McDonald’s rides the risks of Latin America

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“I’m not risk averse. Because of that, I do what I do in this part of the world.” So said Woods Staton, CEO of Arcos Dorados, the world’s largest McDonald’s franchisee and the largest operator of McDonald’s restaurants in Latin America and the Caribbean, in a recent interview with beyondbrics in Mexico City.

The region is fraught with risk: fading growth in Brazil and Mexico; lower consumption patterns in some parts of the region; forex volatility and the need to report earnings in dollars while revenues are not in dollars; electoral uncertainty in some countries; and tough competition in the fast-food segment in general. Despite all that, Arcos Dorados performed well in the third quarter, as shown by financial results reported on Tuesday.

Here’s Staton from the company’s earnings conference call:

Despite continued soft consumption across some of the markets, we achieved comparable sales growth of 12.6%, organic revenue growth of 18.5%, and organic adjusted EBITDA expansion of 25.8% in the quarter.

I am particularly pleased with the margin expansion achieved in Brazil despite the weakened environment…

Moreover, the results underscore the continued strong brand preference that exists in our region. In an environment where economic and political uncertainty continue to impact several key markets, our team has drawn on decades of operating experience in Latin America to implement strategies focused on those areas within our control…

Based on internal and available public data, in the third quarter, we once again outperformed our listed peers in terms of comparable sales and outpaced most consumption metrics in key markets.

With third-quarter revenues of $1bn, sounds like the risks aren’t insurmountable. Indeed Staton expects Arcos Dorados to report full-year revenues in line with expectations. But he also warned that given:

… continued mixed signals in the regional macroeconomic environment, we plan to… moderate the pace of our restaurant openings in the near term.

Arcos Dorados shares have struggled since the company’s IPO in 2011. At $12.35, their current price is well below the $17 debut and barely more than half the price of above $21 hit on the first day of trading. But Staton is sanguine.

He told beyondbrics in Mexico: “It’ll go back up… We’re here for the long term. Latin America is a great place to invest in the kinds of products we provide. There’s a growing middle class, changing lifestyles. Economies might slow down but they [the middle-class] aren’t going back [into poverty]… We depend on these emerging cities… There’s plenty of room for growth.

McDonald’s, he reasoned, was an “aspirational brand” and the company was way ahead of schedule on its growth plan. So risk averse or not, the long-term future sounds rosy. Or should that be golden?

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