For all the strides being taken to rekindle the relevance it enjoyed in the United States as recently as 2011, McDonald’s still doesn’t have a firm grip on its target market here. In China, however, it’s crystal clear who its customer is, what those customers are expecting from eateries, and what the company needs to do to fully capitalize on the opportunity.
In short, China’s middle class is still expanding like crazy. A report published by McKinsey & Co. in 2012 calculated that the number of people in China that earned between $17,000 and $35,000 would grow from only 6% of the population in 2010 to more than 50% of China’s populace by 2020. That’s a demographic right up McDonald’s alley.
Meet the New Chinese McDonald’s
And what exactly is McDonald’s doing to reframe itself in China, where it’s generally only found a lukewarm reception compared to its rival, Yum! Brands (YUM) division KFC? First and foremost, it’s de-Westernizing its stores there.
Ten years ago, when China become a hotbed of growth for consumer-oriented American companies, the presumption was that the Chinese wanted a perfect recreation of the typical U.S. eating and shopping experience. Now, however, U.S. companies have learned (some the hard way) that there’s a limit to how much Western culture a Chinese consumer wants delivered when inside a Western restaurant or retail establishment; there are still cultural aspects unique to China that are must-haves for anyone serving consumers there.
For McDonald’s, that means remodels and new-builds that incorporate Chinese — and even provincial — flare, like hanging lights and dynasty-era architecture. It also means more food that’s familiar to the locals. Spring rolls and rice are finally on the menu at most of China’s McDonald’s, and much of the focus has been turned from beef and towards chicken or pork; beef is rarely part of the typical Chinese diet.
It’s not just the menu and the buildings’ ambiance that McDonald’s is retooling to attract China’s burgeoning middle class, however. A great deal of thought has gone into how that middle class thinks, acts, and dines, and the end result is the installation of large, round tables that can seat ten. It’s something none of its American units would do because it would be waste of valuable floor space; we rarely eat as a party of ten, particularly at a fast-food restaurant. That’s not the case in China, however, where extended families are more apt to eat together. The large, round tables facilitate socialization during mealtime … a lost art in the U.S.
Bottom Line for MCD Stock
As for the investability of MCD stock, while it’s certainly disappointing that McDonald’s remains befuddled by American consumers, it may be worth considering the possibility that the average American consumer may be disinterested in Big Macs and McFlurrys and McCafes for reasons that go beyond the restaurants’ abilities to deliver a decent customer experience.
The reason for the struggle, however, is also moot. What fans and followers of MCD stock may want to appreciate is that McDonald’s is pretty close to hitting the nail on the head in a foreign market that’s going to serve up much more growth for the company than the United States could foster.
Although China isn’t likely to be the focal point of the company’s conference call, that doesn’t mean it’s not the critical growth spot for McDonald’s for the foreseeable future. As a modest piece of evidence to that end, while U.S. same-store sales were down 1.7% in the first quarter, same-store sales for the Asia-Pacific, Middle East, and Africa group were up 0.8% in Q1 — and Asia is the biggest piece of that pie. The numbers may feel small, but they underscore a very big trend that just may pull the company’s fat out of the fire.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.