China accounted for over half the revenue of Yum! last year and therefore is an essential market. Yum! claimed that the company would start reporting positive numbers in the second half of 2013, but numbers remained dull for long. The company was experiencing lackluster sale until recently when Yum! reported better than expected same store sales in October. So is this news of relief for investor?
Yum! was aggressively increasing its footprints in China when the company got hit by the chicken supply issue in December 2012. The company opened 889 outlets in the mainland last year as it earned over $1 billion operating profit from the region. But the entire expansion program got slowed after December 2012. Also, just when numbers started to improve in the first half of 2013, China got hit by the Avian Flu which again pulled back customers footfall.
However, other players too got adversely affected and suffered softer sales throughout the year. McDonald’s (MCD) and Starbucks (SBUX), both reported decline in sales and experienced a slowdown in same store sales.
But October sales seem to have brought some smile on the investors faces. Other than heavily promoting through marketing campaigns and advertisements, the company also has plans for restructuring the business for better results and growth. Same store sales is still struggling in China which fell 5% in October, but better than expectation. KFC outlets saw 7% drop in same store sales, but Pizza Hut Casual Dining gave good numbers and accounted 10% growth. This helped the company to compensate for KFC’s lower sales.
As per the reorganization plan, Yum would amalgamate its international divisions of KFC, Pizza Hut and Taco Bell with its US division. However, it would keep its China and India division separate and independent of the rest.
Both China and India are emerging markets where the middle income group is growing, getting busier by the day and opting for eateries to satiate their hunger. These two budding economies are the key to Yum!’s growth in the future. The fast food restaurant giant expects to have around 1,000 restaurants in India by the end of 2015. The fast food giant has plans to invest $10 billion in emerging markets to tak maximum advantage of the growth. Yum! is not the only quick service restaurant chain eying budding economies. Fellow players McDonald’s, Starbucks, Burger King (BKW) also have massive plans for expanding in these markets.
Yum!’s shares have recovered remarkably after poor September sales which is a good sign. The company may be facing difficult time now, but it has great potential. This is not the first time that Yum! suffered a setback in the mainland. It has faced similar issues involving bird flu outbreak and successfully managed to come out safe and strong. What remains to be seen is how long would the company take to recover to prior level sales in its most lucrative market.