U.S. Fast Food Companies Growing In China
The Dynamic Wealth Report
June 9, 2008
Capturing China Growth One Bite At A Time
This weekend I was up in Flagstaff relaxing at our family cabin. If
you’re not familiar with Arizona, Flagstaff is the largest city in
Northern Arizona. It’s home to Northern Arizona University and is often
used as a stopping point for travelers making their way to the Grand
Canyon.
The cabin’s a great escape. It’s the perfect location to avoid the heat
of the desert, the bustle of the city, and the distractions of everyday
life. Temperatures this time of year are in the high 70s with overnight
lows in the mid 50s. The only struggle is the end of the weekend when
you need to talk yourself into packing up and leaving.
To put it simply, it’s the ideal relaxation spot.
As you can imagine, at the cabin I get quite a bit of reading done. Of
course my fun reading is financial journals, news, and industry reports. I know, I’m a bit crazy. Anyway, one of the articles I read was about
China. The investment ideas offered up made little sense to me. A lot of
convoluted numbers and incorrect conclusions were drawn.
That’s when I thought to myself there has to be an easier way. So I did
a bunch of research and I discovered some interesting facts . . . but
more on that in a minute.
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Now many of you have read my other articles on China. I think as an
emerging nation, it’s a great one to get behind from an investment
standpoint. Investing at these early stages is always risky, but the
rewards are tremendous.
The nation is in the midst of one of the largest developments we will
see in our lifetimes. Development is progressing at a break-neck pace. Roads and bridges are being built, industry is sprouting, and the
workforce is evolving.
What do I mean by that?
I mean that just 20 years ago the country was primarily focused on
agriculture. Now a significant portion of the country is focused on
manufacturing, construction and other trades. Products in China are
being developed and built. As a result, the workforce is growing, as is
the middle class.
The opportunities are everywhere in China. So, how can the average US
investor get in on this great opportunity? I’ve already talked about the
China ETFs. These baskets of stocks are great, but what if you want
something more specific?
I started thinking about all of the US-based companies expanding
operations in China. It seems not a day goes by without someone
announcing a new China initiative. Automobiles, industrials, energy
companies, even restaurants. Everyone is jumping aboard the growth of
China.
Then I had another thought . . .
Asian diets are changing. It used to be rice and vegetables. Now the
Chinese diet includes more protein and packaged and processed foods. The
US fast food culture (for better or worse) is making its way across the
ocean and setting up shop in China.
The Big Three of Fast Food.
McDonald's (MCD) sees the growth in China. They have plans to open around
275 new stores by the end of 2009. That’ll bring their total to about
1,000 restaurants. Burger King (BKC) was early to the China trend but
clearly stumbled. They opened the first store in 2005 to great fanfare. Today they’ve added a whopping total of 12 new stores according to China
Retail News.
What a missed opportunity.
There’s one company that’s outdoing both Burger King and McDonald's.
Yum!
Brands (YUM) is clearly breaking away from the pack. I know. They have a
strange name, but I didn’t make it up.
Now if Yum! doesn’t sound familiar to you don’t despair. You probably
know them by one of their restaurant names. As a matter of fact, I’d bet
you’ve probably eaten at one of their stores in the last month.
Yum! operates and franchises stores under the banners of Long John
Silver’s, Pizza Hut, Taco Bell, A&W, and of course KFC.
Does that ring a bell? I thought it would. This company is truly
amazing; it’s like owning five different fast food companies all at the
same time. They have more than 35,000 restaurants in more than 110
countries. And in 2007 their sales were more than $10 billion. Not bad
for a fast food chain.
But that’s not even the exciting part.
Remember the facts I promised you? Here they are.
The real excitement for Yum! Brands is China. Since 2005 the company has
been breaking out results for the China division. That’s how important
this growth is to Yum. The company has opened more than 3,100 stores in
China and more are opening every day.
This is their number one market for expansion. Just last year alone, the
China Division contributed more than $375 million in operating profits. In 1987 they opened their first KFC in China, now they have more than
2,200 operating right now. Their Pizza Hut franchise is working hard to
catch up. They opened the first Pizza Hut in 1990. Now they have 360
stores in operation . . . and more on the way.
For Yum! Brands the growth potential seems unlimited. If you ask me, Yum!
Brands is the American way to capture growth in China!
• Hotels Index (Down 12%)
The ripple effect from oil continues. Airlines are cutting routes and
capacity. And with high gas prices fewer people are looking
to travel for vacation. Hotels are suffering from the reduced number of
travelers during this important vacation season. As a result the hotel
index is off more than 12% in the last month.
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