When in the early morning hours of January 3, 2020, a US missile hit the car of Major General Qassem Soleimani at Baghdad’s international airport, deliberately killing Iran’s most revered military commander and an Iraqi general, a lot of things went to pieces. Diplomatic etiquette, hope for peace in the Middle East, the US status as a power broker to begin with.
It is not clear what the US administration tried to achieve strategically with the assassination of Iran’s popular war hero. Yet this new low in State behaviour was soon ghastly magnified by President Trump’s follow-up announcement to not hesitate sending rockets into Persia’s millennia-old, cultural and architectural treasures, many of them UNESCO World Heritage Sites.
America, once the admired and undisputed leader of the free world had, quite unbelievably, resorted to culture warfare in the mould of ISIS and the Taliban. This was unprecedented, yet again degrading international law after America’s unilateral withdrawal from the Iran Nuclear Deal Framework four years earlier, brokered and signed by the US itself with Iran, Russia, China, France, the UK and Germany.
What makes this half-cocked act of war significant to us retail investors is the heightened impact on globalisation, already in retreat after Trump’s war on trade. Companies profiting from international sales and supply chains will now not only suffer from tariff and regulatory barriers. They will also be hurt by consumers turning their backs on foreign brands being particularly hostile towards US firms with anti-Americanism is on the rise. Attacks on sales outlets can be expected.
For no other company is this more critical than for McDonald’s, the world’s largest restaurant enterprise, operating in 120 countries and serving 69 million customers per day.
McDonald’s is a hugely successful business, adapting with skill to local tastes. When the company opened its first restaurant in Moscow in 1990, citizens were queuing for miles around Pushkin Square, spending what was then a fortune on their first Big Mac. After 70 years of communism, Muscovites experienced for once friendly service in a clean, contemporary setting. Patrons were so shocked that the staff was actually advised to smile less in order not to terrify customers who were used to rude and inefficient service!
I was stationed in Moscow at the time, watching with disbelief how a US company managed in no time to bypass red tape, to cope with non-existent supply chains, duck protection rackets and to instil a service culture into their recruits which had never existed before.
Not even the fact that profits could not be freely converted or transferred out of the country at the time deterred the enterprise. It was a joint venture with the city government of Moscow, as I later learned. How implausible this sounds now: Russian officialdom helping out a US company. Today many of its 650 Russian outlets are suffering torturous ‘sanitary inspections’ and are collecting stilted fines in answer to Crimea-related, and not-so-related, embargoes.
Ninety-eight per cent of McDonald’s food supplies in Russia are locally sourced. Even ketchup and mayonnaise are produced in Russian factories. The company is essentially a Russian business, unimpeded by tariffs. Yet the company mascot, Ronald McDonald, even when fluent in Russian, epitomises the American way of life with its golden Double Arches, memories of Route 66 and Stars and Stripes.
This is a legacy that will hurt the bottom line. China’s 2,700 McDonald’s eateries will increasingly suffer too, despite the fact that they expand optimistically into ever remoter provinces, offer Chinese fast food along with their burgers and are essentially a Chinese State enterprise, as McDonald’s had wisely sold a majority stake in the business (52 per cent) to China’s State-owned Citic Group. It still holds 20 per cent though, and identified the People’s Republic as its “most important market outside the US”.
It is questionable if the brand can fight the onslaught of the ever more Barbarian antics of America’s political leaders
Nationalism is a force too hard to control over the long-term, as the all-powerful Communist Party will soon have to realise, even in a country which goes to great lengths to manipulate, control and monitor its population Orwell-style.
McDonald’s has tuned its income streams to perfection. A combination of franchise fees and royalties imposed on 38,000 outlets create revenues of $23 billion per annum (2017) and a net income of $5.2 billion.
The corporation is not only a franchise; it owns the land of many of its restaurants outright and collects rents from its franchisees. Consultants and activist investors have therefore regularly suggested to spin off the real estate business into a separate entity, which successive CEOs have rightly refused to do. The company knows its tenants much better than any specialised landlord could. In its hands, rental income will never flounder.
The company, worth approximately $152 billion at the time of writing, is a first-class dividend payer. It has increased payouts to shareholders continuously over the years. A dividend yield of 2.47 per cent, supported by a profit margin of almost 30 per cent, compares very favourably with today’s corporate and government bond yields.
Someone putting money into McDonalds in January 1980, when shares ‒ adjusted for splits – were traded for little more than $1, would have increased her investment by an astounding 18,000 per cent. This equals the success rate of Warren Buffett’s investment vehicle Berkshire Hathaway, the world’s most prudent investor.
Interestingly, Buffett, who lives on a life-long diet of Coke and French fries, does not always put his money where his mouth eats. He decided to divest of his 60 million McDonald’s shares in 1998, at an average price of $30. He missed out on further gains of 575 per cent, as today’s share price fluctuates around $202. Having pocketed a handsome profit, he could not see much further upside for the stock.
Did Buffett make a costly mistake? What surprises is the fact that he still held on to his investment in Coca Cola, which perfectly mirrors McDonald’s global success. Today’s biggest shareholders in McDonald’s are fund and asset managers, like Vanguard (8.81 per cent), Black Rock (4.89 per cent), Fidelity and T. Rowe Price. Their investment helped them to gains of 14.98 per cent in the last year alone. Admittedly less than the total US stock market, but most funds would have been proud of such stellar results.
If you own certificates of a US investment trust, or bought an exchange trade fund mirroring the NYSE, you may unknowingly be a McDonald’s shareholder too.
McDonald’s had to face a lot of critique over the years. As an employer it was reluctant to pay a living wage in many countries, often paying less than the legal minimum. Zero-hour-contracts proliferated. The US taxpayer had to subsidise McDonald’s domestic employees to the tune of $7 billion per year. Suppliers were bullied to deliver at unsustainably low prices.
Suspected copyright infringements were pursued with cruel vengeance. Religious communities complained about dietary misdeeds, like Hindus complaining about beef flavouring in French fries. Hygiene standards at times spectacularly failed. I still remember the photo of a fried mouse found in the hamburger bun of a Viennese customer.
Rainforest activists and animal welfare organisations went to the barricades. Nutritionists and the medical profession accused McDonald’s menus to massively contribute to obesity, cardiovascular deceases and diabetes.
Yet the company was always keen to learn the lesson. Recipes are more health-conscious today, with salads and fruit as a standard feature in most outlets, and the banning of artificial preservatives, flavours and colourings. Trans-fats are reduced, sustainability and responsible farming is understood to be an issue for many potential customers.
Kosher food is served in Israel, beef banned in India and halal observed in Muslim communities. A focus on local food tradition makes McDonald’s anywhere unique, with beer being served in Germany and schnitzel in Vienna.
Yet the biggest restaurant enterprise on earth is still quintessentially an American institution, a symbol for everything America stands for. It is therefore questionable if the brand can fight the onslaught of the ever more Barbarian antics of America’s political leaders.
At an enterprise value of 25.6 – expressed as a multiple of earnings – much optimism is priced in. Decreasing revenues over the last couple of years do not forebode well. Perhaps Warren Buffett was right. US belligerence, its ill will and nationalistic mottos will not help make Ronald McDonald look great again. Not anytime soon.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com