China is eating less KFC chicken, and that has hurt sales at the chain’s U.S. owner, Yum Brands. Revenue at the group’s comparable Chinese branches fell 11 percent in the third quarter, year on year. While last year’s fears of antibiotic-laced Zinger Burgers didn’t help, fierce competition has also made the company a less reliable bellwether of Chinese appetites.
Yum is still a China success story. Sales in the region make up more than half of the group’s total, compared with a third just five years ago. It has twice as many outlets now as it did in 2008. Unlike other global brands like McDonald’s and Starbucks, it gives clear data on its sales and margins in China too. Given the poor quality of official Chinese retail data, it’s little surprise Yum is often seen as a proxy for the Chinese consumer.
Source: John Foley, Robyn Mak 9/10/2013
But over the past year, KFC and its customers have decoupled. The decline in same-store sales is partly an after-effect of a supply scandal last December in which KFC found one of its suppliers had obtained chicken laced with excessive drugs and growth hormones. That may have damaged the extra trust consumers afforded to foreign brands. Yum just cut its earnings forecast for the year, and has abandoned its claim that Chinese same-store sales would turn positive in the fourth quarter.
Even when it shakes off its troubles, Yum can no longer hope to grow just because China does. Competition is fierce. Just as KFC adopted its menu to suit local tastes, selling items like fish ball soup alongside Western classics, ambitious local competitors like ramen chain Ajisen and Country Style Cooking have picked Western-style fast food management and cost-saving measures. Both reported same-store sales growth in their most recent filings.
Yum hasn’t lost its faith, and still plans to grow its store base by almost 13 percent over 2013. Investors are still hopeful too, judging by the group’s 25 percent premium to McDonald’s, based on forward price-to-earnings multiples. But for understanding the Chinese consumer, fried chicken is no longer a leading indicator.