McDonald’s Heads To Siberia After Success In Western Russia
McDonald’s Corporation (NYSE:MCD) is planning to open its first restaurant in Siberia, a region in East Russia. Earlier in the year, McDonald’s signed an agreement with Rosinter to franchise restaurants which will see the fast food giant adding 45-50 restaurants in the country each year. Until now, all of the 324 McDonald’s restaurants in Russia were present in the western part of the country since the supply chain and logistical constraints did not allow the fast food chain to open on the Eastern side.
The stock is down more than 10% since the start of the year as the company faces a slowing comparable sales growth with July’s performance being the worst in nine years. A strong U.S. Dollar is also hurting the overseas revenue of the company. [1]
Siberia is good for McDonald’s
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McDonald’s comparable sales growth in Europe for this year so far has hovered in the region of 2-3% as it is feeling the heat due to the weak economy. Comparable sales growth was driven by strong performances in the U.K. and Russia. Expanding in Siberia will give McDonald’s a better mix of restaurants since the Russian GDP growth rate is not only above the global average, but also does not face any imminent debt crisis. Moreover, there is a paucity of fast food chains in Siberia with KFC and Subway being the only two international chains present.
Comparable sales growth might also be getting negatively impacted because of ubiquity of restaurant chains i.e. sales of one outlet might be cannibalizing (or slowing down) the sales of the other. However, since this is a new territory for McDonald’s, it is not likely to face this problem. On a cautious note, it is still early days and given that McDonald’s has more than 32,000 restaurants globally, it will take some time before the Russian success could show any considerable impact on the company’s income statement.
We have a $96 price estimate for McDonald’s, which is about 10% higher than the current market price.
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Notes:- McDonald’s mulling eastward expansion, August 27, 2012, english.ruvr.ru [↩]