Key Takeaways:
U.S. fast-food chains face a potential slowdown in global expansion due to Middle East tensions and rising energy costs, with some brands holding significantly more risk than others, a Jefferies report said Tuesday.
"Operators for now are likely to slow the pace of new openings, focus on value offerings to protect traffic, and control costs to preserve margins," Jefferies analyst Andy Barish said in the report.
The analysis flags Domino’s Pizza, Yum! Brands, and Starbucks as most vulnerable. Over 65% of Domino’s projected unit growth and roughly 50% of expansion for Yum and Starbucks is concentrated in the Middle East, China, and India. In contrast, McDonald’s has a more diversified plan, with only 35% of its future growth tied to those regions, making it the best-positioned among peers.
While most chains have limited direct exposure to the Middle East, typically 2% to 4% of global units, the primary risk comes from higher energy prices impacting consumer spending in key growth markets like China and India, which rely heavily on oil imports.
According to the report, higher energy costs create a dual threat. They can dampen consumer spending and increase operational costs for transportation and food inputs. In India, shortages of liquefied natural gas have already disrupted restaurant operations. Meanwhile, the hyper-competitive Chinese market gives restaurants limited power to raise prices, squeezing margins when input costs rise.
Restaurant Brands International, owner of Burger King, appears more insulated, with the regions accounting for just 11% of its current stores and 25% of its expansion pipeline.
The market has shown mixed reactions this year. Shares of the more exposed Domino's have fallen 13.2% year-to-date, and McDonald's stock has lost 7.2%. However, Yum! Brands, Restaurant Brands, and Starbucks have seen gains of 7.4%, 15.9%, and 17.3%, respectively.
The Jefferies report suggests that McDonald's large scale and strong franchise structure provide a buffer against economic volatility. Investors will be watching upcoming quarterly reports for signs of slowing unit growth or margin pressure in international markets.
This article is for informational purposes only and does not constitute investment advice.
