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Will Yum! Withstand Its Struggle in China?
Posted by: Live investor (IP Logged)
Date: September 29, 2013 06:28PM

Yum! Brands (YUM) has been facing difficulty in its top international market China from where it earned over 50% of its revenue in 2012. Post December 2012 the operator of KFC, Pizza Hut and Taco Bell started witnessing difficult times in China after the food regulatory agency ran a search over the antibiotic levels of the chicken that these quick service restaurant chains, including McDonald’s (MCD) and Burger King (BKW) use.

The comparable store sales have been declining since then. This is a big hit to the Westerners, particularly Yum! since its scale of operation in China is huge. It runs over 6,000 outlets in the emerging nation. Comparable sales faltered 10% in August, which was better than a 13% plunge in July.

KFC Continues to Struggle

KFC continues to be witnessing poor results with lesser customers due to the contaminated chicken issue. China’s growth rate has also decelerated post the recession in 2010 and this had an adverse effect on consumer spending thereby hampering restaurant sales growth. The bad publicity that got generated from December last year is still weighing on Yum!’s KFC sales.

Also, looks like Yum! is somewhat destined to witness hard sales during this time of the year. Just when its outlet started recovering, the company sales got dampened by the news of Avian Flu that spread across the nation in March.

Even McDonald’s has been suffering from the consequences of the chicken scandal. The past three quarters have been pretty challenging for McDonald’s as it saw negative same store sales growth despite having a wide range of items in its menu. This clearly suggests that the chicken scandal and the Avian Flu are not the only reasons hurting sales of these Westerners. The overall macro economic condition and the slowdown in the market is curbing consumer spending. However, Deutsche Bank’s economists are hopeful that these restaurant chains would experience soft recovery in the last quarter of the year with a better outlook for the coming year as China is showing signs of recovery.

Looking Ahead

The fast food giant has been working hard from quite some time to regain consumer confidence through various marketing campaigns and airing commercial advertisements. In fact it has been inviting people to visit its supply chain spots, kitchen, and poultry farms to reassure the quality of Yum!’s offering and its commitment to safety. Additionally, KFC is also promoting its offerings by giving discounts.

The new units opened by Yum! in smaller Chinese markets are providing better cash margin to the company and accordingly the company has started concentrating on these smaller markets. Both Pizza Hut and KFC have a huge presence in the Chinese market and despite the present setbacks due to the chicken controversy, Yum! is determined to make it really big in the budding economy. Some investors are worried about KFC’s future in the nation and are wondering if the outlet has lost its luster after the chicken antibiotic level investigation.

August same store sales may be down than last year figure, but they fall is much better than expected and shows monthly improvement over July when it suffered a decline of 13%. It is but normal for investors to be anxious about the future outlook of the stock, but I believe that Yum! has huge potential to grow. It has witnessed similar issues in China earlier and so it knows how to come out safe and stronger from such happenings. Patient investors who hold on to this stock shall be rewarded in the future.

Stocks Discussed: YUM, MCD, BKW,
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