Can Cuba Fix McDonald's Corporation, and Vice Versa?

By Markets Fool.com

Continue Reading Below

Let's do the time warp again. Communist policies have trapped the Cuban economy in a time machine set for the 1950s. Source:Jaume Escofetvia Flickr.

President Obama hit the reset button on relations with Cuba.

Walled off from American capitalism for over half a century, the tiny island nation's economy struggles under the failures of communism and opening up to foreign investment is a chance to save the people from its government. U.S. businesses are tugging on the leash for the chance to tap the repressed market.

A rags to riches story
Although there was angst expressed across social media that normalizing relations with Cuba would lead to the island's "Americanization," the chance to raise people out of poverty and oppression offsets whatever faux nostalgia for authentic tyranny some people hold.

And arguably, one business most representative of American free enterprise is McDonald's .

Continue Reading Below

Started from a single hamburger stand in 1955, it's become a global fast-food colossus with more than 35,000 restaurants that would serve not only as an inspiration for how capitalism can benefit Cubans, but also provide the vehicle for doing so.

The original McDonald's in Des Plaines, Ill. would seem right at home in today's Havana. Source: Tripp via Flickr.

Of course, the U.S. Navy might object to a McDonald's invasion. Since 1986, it's operated the sole McDonald's restaurant on the island at its Guantanamo Naval Base.

So, what are the benefits to the burger chain and the people from McDonald's entering the Cuban market?

Benefits to McDonald's
Obviously, an increase in revenues would be the immediate result. At a time when McDonald's is suffering from falling sales iworldwide, a new market like Cuba could quickly allow for an uptake of the brand.

It's already the fast-food leader with an 18% share of the Latin American market, distantly followed in second place by Burger King with 6%, Subway at 5%, and Yum! Brands' KFC at 3%. And almost 70% of McDonald's revenues come from international sources.

Despite some high-profile problems in Asia this summer, it has significant experience entering and integrating itself into new, emerging markets. Not just China and India, but also Africa and the Middle East, too.

Benefits to Arcos Dorados
The duty for carrying out a Cuban strategy, however, would likely fall toArcos Dorados, the largest McDonald's operator in Latin America operating over 2,080 restaurants in 20 countries across Central and South America and the Caribbean. It's also McDonald's biggest franchisee in the world.

Its biggest market is Brazil, which accounts for half of its total revenues, but with locations in Mexico, Panama, Costa Rica, and nearby Puerto Rico, establishing a beachhead in Cuba would be a natural extension helping to offset the political and economic upheavals in Venezuela and Argentina.

Source: Arcos Dorados.

Venezuela is Arcos Dorados' largest market in the Caribbean division, accounting for 35% of segment revenues. But inflation is running rampant at 57%, and sales tumbled 56% over the first nine months of 2014 as the monetary policies of Venezuelan strongman Nicolas Madurodevalued the country's currency 88%. Exclude the market manipulation, and third-quarter revenue actually rose 9% from the year ago period.

Similarly, Argentina is in turmoil after being declared in default on loans to U.S. lenders. That drove revenues down 13.5% last quarter for Arcos Dorados as the Argentinean peso was depreciated 54% from last year.

If nothing else, Arcos Dorados has knowledge of Latin American markets and of dealing with autocratic regimes.

Benefits to Cuba
Clearly a healthy dose of the entrepreneurial spirit is what's needed to cure an ailing Cuba. Franchising as practiced by McDonald's would imbue the people with that spark of creativity and provide an incentive to improve their station.

An education in pulling yourself up by your bootstraps. Source: Arcos Dorados.

Employees would gain value from undergoing the on-the-job training the burger chain provides while also giving them a chance to develop their managerial skills. McDonald's Hamburger University is a global training facility with campuses worldwide that allows it to develop tomorrow's managers from within.

The biggest question, of course, is whether or to what extent Cuba will allow free enterprise to operate. Letting Coca-Cola be sold in the corner bodega is one thing; allowing the Cuban people to own the means to throw off their shackles is quite another for a communist government.

An example worth following
Still, the example of China is noteworthy. Foreign investment led to an expanding consumer class where Western brands are held in high regard. U.S. and global franchises introduced modern business systems into the country that led to a standard of excellence it continues to try to emulate.

There are only benefits to come from normalizing relations with Cuba. It's not excusing bad behavior, but allowing a repressed people to reap the benefits of their labors. That is a more powerful message that decades of embargoes haven't been able to deliver.

While McDonald's problems are much larger than what one tiny island can cure, its presence can do so much good for the people of Cuba. For that reason alone, it's worth the effort.

The article Can Cuba Fix McDonald's Corporation, and Vice Versa? originally appeared on Fool.com.

Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. Hehas no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and McDonald's. The Motley Fool owns shares of Arcos Dorados and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.