Tuesday 27 September 2022

Is McDonald’s In Latin America In Trouble? Fitch Downgrades Arcos Dorados to ‘BB’; Outlook Revised to Negative

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Fitch Ratings has downgraded Arcos Dorados Holdings Inc.’s, McDonald’s largest franchisee in the world in terms of systemwide sales and number of restaurants, Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured notes to ‘BB’ from ‘BB+’. The Rating Outlook has been revised to Negative from Stable.

Fitch Ratings says it expects the performance of the company to be affected by disruption from the coronavirus pandemic due to the temporary closures of restaurants in several countries.

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Currently, Fitch estimates that 38% of the company’s restaurants have been temporarily closed, only drive-through service and delivery are being offered in another 38% of Arcos stores, and full-service operation (although with restricted hours in some locations) continues in only 24% of its stores.

Fitch’s downgrade incorporates the expectation that restrictions will continue to affect dine-in services through May 2020, across many regions with self-imposed and mandated restrictions being gradually relaxed thereafter. Revenue growth is forecast to decline 20% year-on-year in 2020, taking into account business disruption and currency impact, with a gradual recovery in 2021.

Arcos Dorados is headquartered in Argentina, but its cash flow generation is heavily concentrated in Brazil. The company has the exclusive right to own, operate and grant franchises for McDonald’s restaurants in 20 Latin American and Caribbean countries, including Argentina, Aruba, Brazil, Chile, Colombia, Costa Rica, Curaçao, Ecuador, French Guiana, Guadeloupe, Martinique, Mexico, Panama, Peru, Puerto Rico, St. Croix, St. Thomas, Trinidad & Tobago, Uruguay, and Venezuela. The company operates or franchises 2,293 McDonald’s restaurants and 258 McCafes as of year-end 2019.

Arcos Dorados is one of the largest employers in Latin America with 94,000 employees. For most of its employees, Arcos Dorados is their first employer, with formal pay, benefits and training. The company is consistently ranked as one of the best places to work in Latin America.

Arcos Dorados benefits from the iconic McDonald’s brand but faces various regional economic challenges. About 69% of these restaurants are operated by Arcos Dorados, while the remainder are franchised restaurants.

McDonald’s Franchise Strength: The ratings also incorporate the strength of McDonald’s as a franchisor and the longstanding relationship with Arcos Dorados’ owners and management. The master franchise agreement (MFA) sets strategic, commercial and financial guidelines for Arcos Dorados’ operations, which support the operating and financial stability of the business and the underlying value of the McDonald’s brand in the region. Fitch expects McDonald’s to continue to be supportive of Arcos Dorados’ operations, as in the past.

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Arcos Dorados in Costa Rica currently has more than 50 points of sale, including restaurants, dessert centers and McCafé throughout the country. The company employs about 1,600 people. McDonald’s has been operating in the country since 1970.

 

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