Dateline: Kuala Lumpur, Malaysia
For years, McDonald’s was the darling of the stock market.
Year after year, the fast food chain’s rising dividends and global expansion kept equity investors in a happy mood, leading to impressive gains in McDonald’s stock.
But lately, McDonald’s has been in trouble. In fact, the stock was down 3% just in one day of trading recently.
Now, this isn’t the place for stock research or analysis of individual companies to trade. But there are a few key takeaways from McDonald’s current plight.
In a recent same-store sales report, McDonald’s restaurants in the United States reported a breathtaking drop of 4.6%, much higher than the 2.1% analysts expected.
For a business like McDonald’s that has tens of thousands of restaurants and is still expanding, that’s a huge drop. And the problem all comes down to competition.
There is a reason companies like McDonald’s buy up interests in upstart competitors like Chipotle. Big companies want to option the smaller companies that could put them out of business in the future.
And it is the Chipotles of the world that are giving McDonald’s a run for its money. Casual dining dollars in the United States are up as Barack Obama has driven up consumer spending by lulling society into a gentle sleep about how allegedly wonderful the economy is.
And, suddenly, McDonald’s isn’t good enough for many diners. As US restaurant patrons demand higher and higher food quality, McDonald’s is losing out to other competitors, even while it claims to have increased the quality of its food by offering healthier meals.
Heck, I remember how disgusting some of their fast food restaurants were as a kid, yet they have made remarkable strides just in cleanliness and presentation.
Basically, McDonald’s has done quite a bit of improvements and innovations in recent years, and it is going largely unnoticed.
Now, consider McDonald’s in Vietnam. The chain opened its first restaurants in Ho Chi Minh City and elsewhere last year. In fact, a friend of mine helped oversee the awarding of the national franchise there.
And business at McDonald’s in Vietnam is booming. Occasionally, I’ll see photos of Big Macs and fries posted by Vietnamese friends on my Facebook wall.
While the initial excitement of McDonald’s in Vietnam has worn off, it is still a popular and oftentimes even trendy place to eat. In a city that already has a few decent burger places, McDonald’s is fresh; it’s new, it’s exciting.
If it weren’t for its global presence, I would expect McDonald’s to be in the toilet. Doing business overseas is what is saving them now.
And if you’re an entrepreneur, doing business overseas could be what saves your business, too.
As a small business, you can’t take a page out of the Ronald McDonald playbook and simply buy up your competitors. You have to fight to win.
Which is why the dizzying array of competition in developed markets like the United States makes it very hard to get a business off the ground. I remember a recent flight sitting next to a Romanian entrepreneur who had dreamed of moving to the United States and starting a business.
Until he started Googling a bunch of ideas he had written down, only to find out that a dozen people were already doing them there.
He told me that, in Romania, simple idea can still be successful. Dental clinics catering to Germans and other western Europeans are thriving, even as newer and more exciting ones open up. There is plenty of room for opportunity, he says.
And while my Romanian friend had a sense of awe about just how developed many industries in the United States are, he knew he would likely wind up like most other aspiring business owners do: out of business.
As a free market guy, I’m all for competition. But there is something to be said for having a “high probability business”; that is, one that has an excellent fighting chance not only to survive but to thrive.
On top of a hugely competitive field in practically any industry, countries like the United States suffer from high level cronyism. Companies like Walmart use legislative initiatives and lobbying to shut down their competition.
I still remember the day years ago when a Walmart-led bill in Congress lowered merchant rates for giant companies, but ended the ability to end frequent flier miles on debit cards.
The big companies that are your competition have an additional advantage in the “first world” because they can buy off politicians in a more challenging way than politicians are bought off in the rest of the world.
Doing business in Vietnam may require you to buy a carton of Camels for the cops every month, but it is a low level form of corruption that doesn’t shut all but the wealthiest people out.
And in markets like Vietnam, there is still plenty of untapped potential thanks to these factors that don’t exist in developed markets:
1. Population growth. It’s true that the United States is growing, although market demographics are changing and require adaptation. In the Middle East, Asia, and Africa, the population is growing on its own merits, separate from immigration.
2. Income growth. I always say that the waiter in Cambodia who used to make $80 per month but now works at a five-star villa making $250 per month is an excellent candidate for simply, easy-to-start businesses. No matter where you go in the world, most people don’t dream of being entrepreneurs. They just want to enjoy life.
That means someone who triples their monthly income will go and buy a hamburger once a week. Or as my private equity friend Doug Clayton says, they’ll buy an extra beer on Friday night.
Doug liked this concept so much that when he started his private equity firm in Cambodia, he also started a brewery.
And despite constant allegations of corruption and racism in places like Cambodia, he has successfully gone up against the two local, well-established brands and made some real headway in a way he couldn’t have done directly competing with Budweiser in the United States.
3. Growing economies. It seems no matter where I go, people are optimistic. This can manifest itself a bit too much at times in that people believe, for example, that “real estate never goes down”. But overall, there is great optimism about the economy in emerging markets.
And for good reason. Factors #1 and #2 mean the economy will grow organically, not through government stimulus or the Fed’s legal counterfeiting.
4. Less developed industries. Markets like Cambodia that don’t yet have a McDonald’s still have a demand for burgers. And several local entrepreneurs have picked up a huge first mover advantage by building a chain of stores appealing to local customers.
Costa Coffee has faced quite a few challenges going up against locally owned Brown Coffee, for example. And last year, I shared an example of a Cambodian-made millionaire who started a simple ice cream store before Dairy Queen came in.
Meanwhile, e-commerce all but doesn’t exist in some countries in Southeast Asia, eastern European countries like Bosnia or Georgia, or the Middle East. Certainly not in Africa. I shared last year how the middle class in Laos is paying four times the prices in Bangkok to buy skin care products in their city… if their desired products are available at all.
5. Reverse geoarbitrage. You may have heard of my concept of “reverse geoarbitrage”. Rather than the traditional Tim Ferriss concept of geoarbitrage, where developed world residents go to live in the emerging world to save money, reverse geoarbitrage is all about selling goods and services to emerging consumers at developed world prices.
We are doing this right now in the Middle East, charging premium pricing that Americans wouldn’t pay because they don’t need the service that badly. But in places like Jordan and Qatar and Lebanon, they are more than willing to pay US or European prices, while we get the benefit of lower costs to do business.
There is no rule of business that suggests you have to overcome cutthroat competition in order to be considered successful.
Years ago, when a frustrated former employee suggested much of my success in that business came as a result of landing one or two key clients that propelled the business forward, my response was “So?”
If you make sales, you make sales. If you don’t, you go out of business. There is no medal in business for overcoming adversity.
Surely, business brings with it adversity no matter where in the world you go. However, to think you must enter a market littered with people doing what you want to do is silly. You should go where you can most easily make money.
And that means following my simple successful principle: do what other people won’t. For the same reason beauty pageant queens become real estate agents in Beverly Hills, most people would rather enjoy the comforts of doing business in Cupertino than the isolation of doing business in the Congo.
But most people don’t REALLY want to make money.