China: A look at strategies from McDonald's, Yum! Brands

Many restaurant companies have turned to international growth to offset results from the struggling domestic economy, but when it comes to the largest prize in foreign expansion — China — it is a two-company race between Yum! Brands Inc. and McDonald’s Corp.

As Yum and McDonald’s host investors this week in China to tour their respective systems of nearly 4,000 and nearly 1,500 restaurants, the analyst community has a mixed view of how well each global brand can achieve their goals and withstand new pressures on the Chinese economy. In general, both companies are expected to hit their unit growth targets, but analysts view Yum as more exposed to any possible slowdown in China resulting from food and labor inflation.

“The overall market appears to be a win-win for both McDonald’s and Yum, as there is very limited competition from local or Western brands,” Jeffrey Bernstein, an analyst with Barclays Capital, wrote in a recent research note. “Currently, sales are very strong for both companies in China, and inflation is the largest challenge, with food inflation reaching double digits and labor inflation expected to remain in the mid- to high teens in coming years.”

Executives from both companies in recent quarterly earnings calls have pointed to opportunities in China centered on expanding dayparts, value, drive-thrus and 24-hour service.