China Consumer

A little less yummy?

Fast food leader reports slowing sales growth

A little less yummy?

They’re finger lickin everywhere

After years as a business school case study for how to succeed in China, is Yum Brands – the parent company of KFC and Pizza Hut – struggling to keep its story in the textbook?

In late November, Yum surprised investors by announcing that same-store sales will rise only 6% in China this year. Yum’s New York-listed stock plummeted 10% on the news.

So what’s the big deal? For Yum, a single-digit increase is unimpressive – last year same-store sales went up nearly 20% from the prior year. And the company is also predicting that its China sales could continue to be sluggish through the first half of 2013 before picking up again later in the year.

Yum says there’s no need to panic. “I’m very confident we’re going to have solid same-store sales growth,” David Novak, the chief executive, told analysts at an investor conference in New York. “I believe in our China business model as much today, if not more, than I ever have.”

The company blamed the sales stumble on the slowdown in the Chinese economy, at a time when higher rent and labour costs in first-tier cities like Shanghai are also eating into profits. That’s not surprising news given that McDonalds and other fast food operators like Japanese noodle chain Ajisen have reported something similar. Like Yum, they also cited China’s broader economic slowdown, and slackening demand from diners. It sounds plausible, especially as a meal at Yum restaurants in many lower tier Chinese cities is still regarded as something of a treat, rather than a way of economising on an evening out.

But a closer look at a series of comments on weibo microblogs hint that some of Yum’s China problems may run deeper, with diners unhappy at price rises at KFC, and others even complaining that some of its new menu is “deceiving”.

Take the 9-layer burger, which has been on offer since April. Consumers gripe that it isn’t much different from the standard fare, as KFC counts the condiments as two layers and the bun as two more, says Kan Kan News, a Chinese news portal.

Hence the idea that the burger has ‘9-layers’ is a deceptive one.

And then there are the toxic chicken accusations. Late last month, Chinese media claimed that Su Hai Group, one of KFC’s chicken suppliiers was using feed that allows its chickens to accelerate their growth cycle from 100 days to 45. Although Xinhua reported last week that health inspectors have confirmed that the “fast-growing chickens” are safe to eat, the report unnerved consumers already rattled by a long list of food safety scandals.

Other analysts say it was only a matter of time before Yum’s sales in China would show signs of slowing, as its growth trajectory had been so steep. Still, executives are pushing ahead with new store openings. Yum already has 5,100 restaurants in China, opening 800 new stores this year and planning 700 more for 2013. In May it announced a tie-up with Suning for outlets at the electronics giant’s stores. Late last year, it announced a similar deal with oil major Sinopec to open restaurants in petrol stations.

“Both of these initiatives showed that Yum was increasingly desperate for new business opportunities after building out a national network that already included stores in most of the most profitable locations,” says Doug Young, the author of Young’s China Business Blog.

The Financial Times agrees, saying that Yum’s China problem is similar to Starbucks’ experience in the United States market several years ago. There, the coffee chain was opening new stores so fast that some of them started cannibalising sales at pre-existing ones. That contributed to the chain’s struggle to increase its same-store revenue at the rapid pace to which investors had grown accustomed.

It will be interesting to see if Yum’s own expansion plans lead to the same commercial quandary.

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