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Fast Food and Fast Money in Emerging Markets

Fast Food and Fast Money in Emerging Markets

by Carl Delfeld, Investment U’s Emerging Markets Expert
Thursday, April 21, 2011: Issue #1496

Contrary to popular opinion, the American diet has been improving, with red meat and dairy consumption declining and fruits and vegetables showing a steady upward trajectory. So why are Americans becoming, as my daughter politely puts it, “rounder?”

Fast food is the culprit, especially the consumption of soft drinks, which is off the charts.

Health issues aside, can investors make money on this trend? While fast food in the United States and Europe is mature and saturated, our best bet is to look to global emerging markets that have become addicted to fast food, American style…

Fast Food Franchises Gobble Up Emerging Market Consumers

Yum! Brands (NYSE: YUM), the purveyor of such brands as Taco Bell, KFC, A&W and Pizza Hut, first comes to mind. YUM has 14,300 restaurants in 110 countries and has opened more than 700 new ones each year over the past decade. The Financial Times recently noted that during the third quarter of 2010, YUM sales in Brazil and China were greater than sales in North America.

And of course there’s McDonald’s (NYSE: MCD), which is counting on international sales for about a third of its profits, particularly in mature markets like Europe and Japan. In the near term, they’re focusing on the beef-loving market of South Korea. According to Tim Fenton, president of McDonald’s Asia-Pacific, Middle East and Africa regions (APMEA): “Korea is a big market for us: You’ve got 48 million people and a $30,000 average household income.” MCD plans to invest $15 million in the country this year and $30 million in 2011.

But McDonald’s is a blend of slow- and fast-growth markets. Isn’t there a better option?

Arcos Dorados IPO Huge Success

Last week’s launch of Argentina-based Arcos Dorados Holdings (NYSE: ARCO) (the world’s largest McDonald’s franchisee) on the big board was a huge success – jumping 25 percent on opening day. The shares were priced at $17, above the $13 to $15 the company originally expected. The stock started trading Thursday morning and closed at $21.20.

The initial public offering (IPO) brought in a cool $1.25 billion, 40 percent above projections, and represents the fourth-largest IPO of 2011.

  • Arcos Dorados – “Golden Arches” in Spanish – was put together in 2007, and has 1,755 restaurants in 19 countries and territories, accounting for about five percent of the money spent at McDonald’s restaurants globally.
  • Arcos CEO, Woods Staton, is also a member of the family who founded Latin American Coca-Cola bottler Panamerican Beverages Inc., acquired by Coca-Cola FEMSA SA de CV in 2003.
  • Staton was president of McDonald ‘s South Latin America division prior to the founding of ARCO, and controls an amazing 76 percent of Arcos’ voting rights.

Talk about an inside job!

The big winners of the Arcos offering, besides Mr. Staton, were the company’s private equity backers. Arcos sold just 9.5 million of the 73.5 million shares offered. The rest were sold by investment groups such as Gavea Investment in the Cayman Islands and Capital International Private Equity Fund in Irvine, California.

Following fast food growth trends in global emerging markets could certainly be one way to fast cash. The other seems to be private equity.

Good investing,

Carl Delfeld

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