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McDonald's Is Missing a Key Ingredient on the Way to Recovery

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Is it time for the all-American restaurant to make a push in China?

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MINYANVILLE ORIGINAL The bitterest disagreements between me and my college roommate were about fast food. He, the kind of guy who owned a flag bandana and a replica Captain America shield, was unapologetically pro-McDonald's (NYSE:MCD). I turned up my nose more often than not (although once we did hit up the Golden Arches for a post-Yom Kippur break-fast), denouncing the chain as déclassé. I was a pretty insufferable kid in college.

My friend insisted that McDonald's was on its way up, pointing to the relatively gourmet Angus Third Pounders and Snack Wraps. Evidently, he was right. McDonald's has torn through flat sales estimates for November with a global sales increase of 2.4%, mostly in the US and Europe. This follows a 1.8% decline in October, the restaurant's first monthly decline since 2003.

Analysts pointed to the restaurant's increasingly popular limited-time items like the Cheddar Bacon Onion Sandwich and its improved breakfast item sales as reasons for the sales bump. Another possible explanation is that there's a McDonald's right outside the Delancey St. stop on the F train, and I cannot stop walking into it and buying entire cows worth of Quarter Pounders.

Understandably, this has investors and analysts optimistic. Janney analyst Mark Kalinowski upgraded McDonald's to a buy from neutral, claiming that the company's easier comparisons over 2013 will be healthy for the stock. The share price has been climbing back from its yearly low in November, rising to $89.41 from $84.05 after plunging from a recent mini-high in October.

There is, however, reason for caution. The greatest sales increases this month were in the US and Europe, the two biggest markets for the restaurant. Sales in Asian markets, on the other hand, previously areas of great growth, rose only 0.6%.

It is here that McDonald's can take a page out of Yum Brands' (NYSE:YUM) book. Yum's KFC restaurants take on an entirely new menu in Asia, offering noodles and congee made from local ingredients, while McDonald's largely remains the same, save for offering chicken thighs rather than chicken breasts in their sandwiches. There are a few regional adaptations (like the delightfully named Shogun Burger), but overall there's not a massive difference at McDonald's between Chongqing and Chicago.

It's no coincidence, then, that KFC consistently beats McDonald's in China; KFC has better adapted its menu to cater to the market. At the moment, McDonald's is at the mercy of its sales numbers in the US and Europe. The restaurant has begun to adapt its menu to increasingly subtle American sensibilities, adding things like mushrooms, better cheeses, and beef that's not made from "pink slime." Why not do the same overseas and fight KFC for supremacy?
No positions in stocks mentioned.
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