Yum! Brands’ (YUM, Financial) is going through a rough patch in its largest international market, China. Slower than expected sales in the country has triggered the company to trim its profit outlook for the year. There’s no doubt that investors were disappointed as this isn’t the first time in the year that Yum! announced a guidance cut. The company’s shares have tumbled 17.2% since July this year largely owing to the negative publicity that it experienced from the China food scandal. The expired chicken supplied by Shanghai Husi Food Co. has cost the company its hard earned reputation in the Chinese market.
This has adversely affected the customer footfall in KFC restaurants as their confidence in the Westerner’s quality of offerings is dwindling. Here’s a lowdown on the current situation.
Picture taken from Wikimedia Commons
What’s going on?
Yum! expects its full year profit growth to come in around mid-single digit compared with its earlier forecast of 10% a couple of months back. The fast food chain is currently finding it difficult to win back the confidence of the Chinese population. The issue regarding the food safety first cropped up in 2012 December when a supply chain investigation was conducted by a China food regulatory agency. The agency discovered that the chicken used by the company had inappropriate level of antibiotics. Since then, Yum! has been struggling in its most profitable market. Yum! predicts that same store sales in China will fall in the current year compared with last year.
Apart from this, consumer spending in restaurants is also lowering. This, too, will affect the fast food chain as about half its revenue comes from the Chinese market. But all isn’t as bad as it seems to be. The company is very confident that sales will eventually return to previous level. Yum!’s chief executive offcer Greg Creed said “We fully expect to bounce back in China and benefit from tremendous sales leverage as sales rebound.” The company continues to spread its wings in China. It opened 700 new KFC stores in the mainland in the current year. Yum! is optimistic regarding a turnaround in 2015 with operating profit to rise by at least 15%.This, indeed, is a positive sign for the fast food chain. Creed further said:
“We have solid plans to drive same-store sales growth and margin improvement in China, while continuing to open new restaurants with confidence in the world’s fastest-growing economy.”
Regaining confidence and recovering
Yum! is not the only fast food restaurant chain struggling in this foreign market. McDonald’s (MCD, Financial) performance has also got adversely affected, which got reflected in its overall third quarter results. The chicken scare issue has impacted McDonald’s performance as well.
However, both Yum! and McDonald’s immediately severed their connections with the supplier to re-build consumer confidence regarding the quality of their food. One of Yum!’s recovery strategies is to redo its stores, alter the looks and feel to offer an upscale dining experience to its customers. While the company’s sales and profits are squeezing because of sluggish results in China, investors can keep their hopes tied to this stock that has once been the favourite of the Chinese population. Apart from this, the company is also working on expanding its global presence elsewhere that would help it lower its dependence in China.
Slow recovery might raise investor doubt, prompting them to stay away from the stock. However, this is not the first time Yum!’s faced such challenge. It’s sure to come out victorious and reward long term investors.
