Why Is Latin America Lovin' McDonald's More Than the USA?

McDonald's Posts 11% Profit Gain, Predicts Food Cost Rise
Bloomberg/Getty Images/Paulo Fridman
McDonald's (MCD) may be struggling domestically, but it's doing a lot better south of the equator.

Arcos Dorados (ARCO), Latin America's largest restaurant chain and the world's largest McDonald's franchisee, posted encouraging quarterly results on Tuesday. The company reported healthy restaurant-level growth with comparable sales up 10.6 percent for the quarter and 11.2 percent for all of 2013. That stacks up quite favorably to the decline the McDonald's suffered domestically in its latest quarter.

It's important to take those heady upticks in stride. Inflation is a problem through most of Latin America, and most of those gains were offset by the depreciating local currencies in Brazil, Venezuela and Argentina.

However, it's still important to explore why McDonald's is growing in popularity through South America and the Caribbean at a time when the Big Mac daddy is struggling in its home market. Investors won't like the answers.

Succeeding With Monopoly Game, Chicken McBites

Looking over what went well for Arcos Dorados will sound fairly familiar to longtime watchers of the chain. Last year in Argentina and Brazil, McDonald's introduced the Monopoly promotion that it has run for years domestically.

The game has been an annual staple at stateside locations, driving repeat business during the promotion as customers try to grab enough winning pieces to claim prizes that include a $1 million payout. It isn't a surprise that rolling out the promotion based on the globally popular Hasbro (HAS) board game would be a hit in the two countries that contain the majority of Arcos Dorados' eateries.

Another winner for the franchisee was the success of Chicken McBites, the chain's bite-sized fried boneless poultry pieces. They have also been a hit in the U.S., but investors will likely recall the stateside fiasco of Mighty Wings as the defining poultry move closer to home. Whether McDonald's regulars just weren't into chicken wings or if the spicy flavor turned others off, the end of the story is that McDonald's is now selling surplus wings at 40 percent off until they run out.

More than a third of the 2,062 restaurants operated by Arcos Dorados are in Brazil, and that's where the company is emphasizing its expansion efforts. It's favoring freestanding locations which it can keep open as long as it warrants necessary.

Mighty Wings Failed to Fly

It wasn't necessarily one of the operator's better markets. Introducing Tabasco-spiked burgers and a "double bacon" entry didn't drive sales high enough to overcome the plunging currency. However, even Brazil is holding up better than McDonald's itself closer to home.

Despite spending the past few years adding premium entree and beverage items intended to drive purchases higher, folks aren't driving out to McDonald's in growing numbers lately.

%VIRTUAL-article-sponsoredlinks%Things don't seem to be getting any better for the chain that seemed to be holding up well during the recessionary downturn, but is feeling pretty mortal now that the economy's recovering. The world's largest burger chain reported on Monday that U.S. comps fell 1.4 percent in February. That's the fourth consecutive month of negative comparable-restaurant sales growth for the chain's stateside locations.

Beyond the Mighty Wings mistake that left the company with 10 million pounds of unsold wings to dish out, it seems as the chain can't get traction on either end of the pricing spectrum. Tacking on new burgers to the Dollar Menu and introducing gourmet sandwiches haven't been enough to turn comps positive in its biggest market.

It's good to see things holding up better for Arcos Dorados, but the sad reality is that doing what worked for McDonald's closer to home a few years earlier will only take it so far.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Hasbro and McDonald's. The Motley Fool owns shares of Arcos Dorados, Hasbro, and McDonald's. Try any of our newsletter services free for 30 days.
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