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European retail sales pick up, more cash for McDonald and Yum!

Xun Yao Chen

Macro European indicators influence restaurant companies' sales (Part 7 of 12)

(Continued from Part 6)

Food retail sales: A direct association with industry revenue

One of the most valuable indicators that’s directly associated with the restaurant industry’s sales growth is the Food Retail Sales data published by Eurostat every month. It’s a combination of disposable income, employment growth, and consumer confidence. The data is released by Eurostat roughly 34 days after the end of the respective month. So the data for August can be expected to be announced on October 3, a one-month lag.

Eurozone growth possibly turning around

Growth for Eurzone food retail sales has been falling from 0.6% since mid-2010 using the six months when problems in Spain and Italy threatened to undermine the European recovery and the future of the euro. Austerity measures were thrown into place to rein in on large government deficits. Germany was also against using money printing to solve the problem—especially when inflation was high. So it created a negative ripple effect on the overall Eurozone economy, employment, and (consequently) restaurant sales.

The growth rate fell to as low as 1.6% recently, which explains why McDonald’s and Yum! Brands were doing quite poorly during the previous quarters. But we’re starting to see some stabilization, with the growth rate rising from the low point. In July, growth improved to 0.41%. If the turnaround continues, it would be positive for the two companies that have significant exposure to Europe.

United Kingdom performing better than Europe

The United Kingdom has also been having its own problems over the past few years as large debt, austerity measures, and a fragile financial sector derailed the country from a strong recovery. But the country has fared better than the Eurozone as a whole because it doesn’t share the problem where each country using the Euro grows at different place and has a varying inflation rate, while labor and capital movement isn’t as free-moving as it is in the United States.

The latest data from Eurostat shows that food retail sales shot up to ~2.5% in July compared to a year ago. The growth rate will likely come down in the short term, because the indicator has historically been very volatile due to short-term statistical noise. Regardless, the six-month rolling average looks to be turning up, which is a short-term positive for restaurants. Note that the retail data is released as a “volume” metric, which means the actual food retail sales are adjusted for inflation. So actual retail sales data for restaurants is likely higher than the data investors will see here. According to Eurostat, the adjustment uses the changes in material cost rather than the price of the service provided.

The United Kingdom and a low-price menu have been helping McDonald’s

McDonald’s significant exposure to the United Kingdom is also a factor in why the company’s Europe division was able to maintain its growth over the past few years, and has somewhat canceled out the negative growth in Europe. Plus, because McDonald’s is a relatively low-priced restaurant, when economic activity starts to slow, it tends to outperform. But when business activity remains low, McDonald’s Corp. (MCD) could still be negatively affected as well. If August’s food retail growth shows positive momentum, the restaurant market size should increase, which would help McDonald’s sales. Yum! Brands Inc. (YUM) will also positively benefit, as well as the iShares Dow Jones Consumer Service ETF (IYC), Vanguard FTSE Europe ETF (VGK), and Consumer Discretionary Select Sector SPDR ETF (XLY).

Continue to Part 8

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