McDonald's relying more on international stores

By Patricia Commins

Reuters; Monday August 25

Faced with increasingly intense competition in the United States, McDonald's Corp. (MCD) is increasingly relying on its international operations for the majority of its profits and the bulk of its new-store openings.

``I think there definitely will come a time when 80 percent of our profits come from outside the United States,'' James Cantalupo, president and chief executive of McDonald's international operations, said in a telephone interview. ``I would describe our international business as one of huge opportunity.''

McDonald's, which reaped nearly 60 percent of its overall operating income outside the United States in 1996, has restaurants in 103 countries. The latest additions -- Bolivia and Ecuador -- are slated to open in October.

For McDonald's, the international market, where it has more than 9,000 restaurants, represents an open field compared with the United States.

While McDonald's dominates the U.S. fast-food market with more than 12,000 restaurants, the domestic industry is considered by many analysts to be saturated. Thus for players like McDonald's, Grand Metropolitan's (GMET.L) Burger King and Wendy's International Inc. (WEN), the U.S. strategy is one of stealing market share.

McDonald's, which from mid-1995 to the end of 1996 saw six straight quarters of declining U.S. same-store sales, has scaled back on its domestic expansion. Of 2,400 restaurants expected to be opened this year, 80 percent will be overseas. In the past, about two-thirds of McDonald's new openings have been overseas.

International operations account for 60 percent of McDonald's profits, 80-plus percent of new units and are expected to grow at about four times the rate of its business in the United States, Merrill Lynch analyst Peter Oakes said in a recent report.

McDonald's international presence goes back more than 25 years to a time when the company was starting to sell hamburgers abroad while its U.S. business was carrying the profit load.

``... (T)he U.S. business carried our international operation for many years, while we were building an infrastructure that is paying dividends today,'' Cantalupo said.

With McDonald's opening some 2,000 restaurants outside the United States each year, it will open more units overseas in the next five years than it did in the past 30 years, Cantalupo said.

About 40 percent of McDonald's international restaurants are company-owned, with another 40 percent operated by franchisees and another 20 percent in joint ventures.

``Now our challenge is to dominate those markets ... because that's where the world income is represented,'' he said.

After establishing a presence in many international markets -- including a foothold in places like India, where it sells lamb and vegetarian sandwiches, and China -- McDonald's has taken the lead from its global competition.

``... (T)he most significant international markets (i.e. ones with large populations and growing incomes) have already been entered, and most well ahead of the competition,'' Lehman Brothers analyst Mitchell Speiser said in a recent report on McDonald's.

Still, Cantalupo says, repeating an oft-quoted company statistic, McDonald's serves less than 1 percent of the world's population on a daily basis. That, he believes, presents a ``huge'' opportunity to sell hamburger and french fries to a growing world population with an increasing appetite for Western products.

``If you use 12,000 restaurants in the States as any potential benchmark for outside the United Stats, even adjusting for income levels you have the potential for many times what we have today outside the United States,'' Cantalupo said.

McDonald's stock fell 19 cents to $49.56 on the New York Stock Exchange at mid-afternoon.

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