Yum's KFC still feeling fallout from food safety scares in China

PUBLISHED : Wednesday, 09 October, 2013, 11:56am
UPDATED : Wednesday, 09 October, 2013, 11:57am

KFC parent Yum Brands warned on Tuesday that it will take longer than expected for its restaurant sales in China to rebound, delaying a recovery in the market that accounts for more than half of the company’s overall operating profit.

Shares fell 7.5 per cent as investors digested the news, which came after months of Yum executives reassuring investors that restaurant sales in the country would return to growth in the fourth quarter.

Yum’s sales at established restaurants in China have taken a beating since last December, when a social-media fuelled food safety scare over chemical residues in chicken from some of its suppliers pummeled sales. That was followed by a bird flu outbreak that destroyed many diners’ appetite for poultry.

The Louisville, Kentucky-based company operates more restaurants in China than any other US brand and said it remains confident in its business in the world’s fastest-growing major economy.

“KFC is unquestionably the category leader in China, and we remain confident sales will fully recover,” chief executive David Novak said in a statement.

Yum attributed its China woes to the December scare, but some analysts suggest that its problems are of a different nature. They say China’s middle-income diners – who flock to KFC – have cut their spending because of government austerity measures.

KFC also faces stronger competition from local eateries, and the company may have opened too many fried-chicken restaurants in China, those analysts said.

[Yum must] get messaging out there that consumers will be fine coming into the restaurants
Analyst Jack Russo

“We are seeing a slowing consumer spending environment in China,” Edward Jones analyst Jack Russo said. Yum will “have to continue to run the restaurants really well and get messaging out there that consumers will be fine coming into the restaurants”.

Yum’s same-restaurant sales in China fell 11 per cent in the third quarter.

Those sales then dropped a steeper-than-expected 11 per cent in September, which is the first month of the China division’s fourth quarter.

Yum will launch “an aggressive marketing campaign to fully restore consumer trust in the brand”, spokesman Jonathan Blum said. He said trust in the KFC brand has improved in China since last December but that it wasn’t yet fully restored.

Thus far, Yum has culled all but its highest-quality suppliers. It is also planning a slew of menu items to drive more sales to KFC restaurants, which account for roughly 4,500 of the company’s more than 6,000 restaurants in China.

Blum said Yum executives will elabourate on its new marketing plans on a conference call on Wednesday.

Yum’s third-quarter net income tumbled to US$152 million, or 33 US cents per share, from US$471 million, or US$1 per share, a year earlier. During the latest quarter, Yum had higher taxes and booked a charge related to its Little Sheep restaurants in China.