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Post-pandemic, fast food giants face new headwinds

McDonalds has fared best even as it announces sale of its Russian operations.

The Big Three global fast-food chains felt the full force of the pandemic and as the global economy reopens plenty of challenges lie ahead.

All three are dealing with a staffing crunch and rising inflation which is affecting their wage bill and squeezing their margins. The impact of Russia’s invasion of the Ukraine has had a varying impact. But all three have emerged from the pandemic stronger.

McDonald’s has fared best. Its share price performance over the past two years has led the pack and until this week’s sharp selloff was the only one in positive territory in the last 52 weeks.  Yum! Brands has ambitious expansion plans, but faces headwinds in China which is the second biggest market for its flagship Kentucky Fried Chicken chain. Restaurant Brands International has faced challenges with Tim Hortons and Burger King and is trying to revitalize both in the face of strong competition.

As a group they offer a strong value proposition in a weakening economy. Quick service restaurants sell comfort and familiarity at a low price. This brand power was evident in Russia this week where McDonald’s is selling its holdings. There were long lines at some stores as customers lined up for one last Big Mac.

This loyalty is particularly strong in emerging markets where all three are aggressively expanding. As incomes rise in these markets, they are often the first out-of-home meal dining experience.

All three have raised dividends during the pandemic.  Here’s an update.

McDonald’s (NYSE: MCD) Closed May 18 at $231.05 (All figures in U.S. dollars.)

McDonald’s is the largest and best-known fast-food franchise in the world with 40,000 restaurants in 100 countries. Almost half of its outlets are in Asia although the US remains its largest single market. About 93% of its stores are operated by franchisees.

McDonalds is down 14% year-to-date and is unchanged in the past 52-weeks, (-0.38%) the only one of the group to have fared that well.

McDonald’s reacted to the pandemic by pruning its menu and investing in technology to speed up drive through times and enhance online ordering, pickup and delivery. New ordering software makes suggestions for add-ons based on time of day and user buying habits. McDonald’s launched a loyalty program late last year which has 26 million members.

McDonalds iconic logos with locally sourced french fries in Australia. Credit: Adam Mayers

In response to inflationary pressures, McDonald’s has raised US prices by an average 8% this year. So far, there has been little resistance to the increases, though there are signs consumers are shifting to lower priced offerings.

 In its latest quarter, sales rose 11.8% year-over-year.  Net income dropped 28% to $1.1 billion, in part a response to the closure of operations in Russia. That market accounts for 9% of sales and 3% of profits. All 850 stores have been shut, but McDonald’s was spending US $55-million a month to pay Russian employees, landlords and suppliers and to keep the infrastructure going. It has written off $100 million for inventory in its supply chain.

It announced Monday it is selling its Russian operations after 30 years, saying it was no longer tenable, nor consistent with McDonald’s values.

McDonald’s continues to reward investors. It has increased its dividend for 45 consecutive years. The last increase was 7% with the November payment. The shares yield 2.2%.

 Yum! Brands Inc. (NYSE: YUM Closed May 18 at $109.46 (All figures in U.S. dollars.) 

Yum! is the holding company that owns Taco Bell, Kentucky Fried Chicken, and Pizza Hut. It is the second largest global fast food chain and is about half as big as  McDonald’s.  It has 53,000 restaurants in 155 countries, but almost half of revenue come from the U.S. China is its second biggest market.

 In 2016, the Chinese operations were spun off to Yum! China (NYSE: YUMC), which pays a 3% royalty on revenues to the parent company.  

YUM! is down 21% year-to-date and 8% in the past 52 weeks.

Yum! reported disappointing first quarter earnings as sales and profits missed expectations amid China’s new Covid lockdowns.  

Net sales rose 4% to $1.55 billion and first-quarter net income was $399 million or $1.36 per share.

Kentucky Fried Chicken is the most popular fast food chain in China. Credit: Wikipedia Commons

The company said it would miss its long-term target for operating profits this year as a result of the suspension of its Russian operations. Yum’s company-owned KFC locations in Russia account for 2% of sales. It is finalizing an agreement with Russian franchisees to suspend Pizza Hut operations there. 

Yum’s dividend increased 14% with the February payment to $0.57 quarterly. It yields 2.07%.

Restaurant Brands International (TSX: QSR)  Closed May 18 at C65.48

Restaurant Brands is the third-largest global fast-food operator with 28,000 restaurants in more than 100 countries. About 70% are Burger Kings and 19% are Tim Hortons. The other 11% are Popeye’s Louisiana Kitchen locations.  RBI recently acquired the Florida-based Firehouse Subs chain for US $1 billion.

The stock has performed poorly over the last two years. The shares are down 15% year-to-date and 20% in the past year.

Restaurant Brands reported good first quarter results but is struggling with the same challenges as its peers. The new Covid-19 lockdowns in China have held back its plans for a Tim Hortons expansion. At home, Tim Hortons was struggling before the pandemic. The work-at-home trends worked against its business, with its focus on the morning drive-to-work. RBI has been working to revitalize the brand and Burger King.

The latest quarterly revenue of US$1.45 billion was 13% higher year-over-year. On an adjusted basis, earnings per share of 64 cents was 14% higher.

Burger King is Restaurant Brands’ only chain to have restaurants in Russia, through a joint venture where it owns a 15% stake. The holding amounts to 0.6% of revenue and the closure is not expected to have a material impact on its earnings. 

Last August it revealed plans to spin off Tim Hortons China, but the company has been silent since then. Pre-pandemic RBI announced an agreement with a partner to open 1,500 Popeyes restaurants in China over the next 10 years to capture demand for fried chicken, though it faces stiff competition from YUM’s well-established KFC.

 RBI increased its dividend by 1 cent with the February payment to $0.54 quarterly.  It yields a high 4.18% at current prices.

This article appeared in the Internet Wealth Builder on May 16, 2022.  For information on how to reprint this article please view this page.

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