YUM China Swings to Recovery

Jan 7 2014, 4:28am CST | by

YUM China Swings to Recovery
Photo Credit: Forbes Business

Research is contributed by Yifeng Mao, the Head of Research at Goldpebble Research based in Singapore.  Opinions expressed are our own.

Disclaimer: We currently do not have a position in YUM

KFC China

According to the Goldpebble Consumer Product Monitor, YUM has quietly increased prices by 0.5 to 2 RMB, depending on the item on the menu recently.  We followed up with store visits in Beijing, Shanghai, Shandong, Chongqing and our findings have confirmed price hike of around 5% year-on-year.  The price increase has been unannounced and rarely noticed.  We suspect it is to avoid further friction with the government and local media.

We are also seeing new product offerings, including golden extra-crispy chicken, larger buckets of chicken wings and new openings of dessert corners to cross-sell to existing traffic within stores.   KFC China has started to swap out its main product of ‘finger licking good’ fried chicken to golden extra-crispy chicken, to lower the cost.  Golden crispy chicken is easier to make and spices are locally sourced.

As such, we now expect  approximately 5% year-on-year SSSG (Same Store Sales Growth) for KFC China in December and into 2014, higher than the street consensus.

The long waited recovery follows a catastrophic year of endemic food hygiene and safety concerns, starting from the 45-day chicken scare in Oct 2012 and a CCTV expose on the issue in Dec 2012. That was quickly followed by the bird flu outbreak and scandals over bacteria-ridden ice cubes, tissue paper with fluorescent agents, and barrels contaminated with whitening chemicals in the spring of 2013.  I have provided detailed analysis of the events throughout 2012 in my latest book Tiger Woman On Wall Street.

As a result, SSSG (same store sales growth) for KFC China slumped to -20% in Q1 and Q2 2013 and -10% in Q3 2013. It further narrowed to 0% growth in November.  YUM China management appears to be under increasing amount of pressure to re-deliver growth before Q2, a seasonally weak quarter.

Pizza Hut

Both Pizza Hut brands (Pizza Hut Casual Dining, Pizza Hut Home Service, Pizza Hut Express) continue to grow at approximately 10%. Pizza Hut brands combined represents just under 10% of YUM China’s total revenue. However, they are an important growth driver in China.  In 2013, among approximately 400 new stores openings, half are Pizza Hut stores.

In China, Pizza Hut offers a premium dining experience, with localized flavors and alcohol offerings, and the chain is popular among young Chinese as a venue for dates and parties.

Long-Term Trends Still Cautionary

Nevertheless, we continue to believe that the KFC brand has passed the peak cycle of growth in China especially in the populated big cities. In addition, the strengthening of food safety practices by the local and central governments implies that supermarkets and established chain restaurants will be frequent targets of rigorous inspections if problems are found. Relative to the local businesses, multinational operators are more likely to be targeted of the heightened crackdown.

According to Goldpebble’s broad Consumer Pricing Monitor, the food price inflation in China is likely to be higher than the reported CPI (Consumer Price Index) of 2.5%, led by food, wages and commercial rent.  YUM China’s profit margins are unlikely to rebound back to the 20% level in 2012.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Investments pouring in from Singapore: Bengal minister
Singapore, Aug 20 (IANS) Camping here to woo investors, West Bengal Finance Minister Amit Mitra Wednesday said many companies have signed joint ventures and letters of intent promising to pump in at least Rs.1,200 crore in his state.
 
 
111-year-old Japanese officially declared world's oldest man
Tokyo, Aug 20 (IANS/EFE) Sakari Momoi, a 111-year-old Japanese citizen, was Wednesday officially recognised in Tokyo as the oldest man in the world by the Guinness World Records award committee.
 
 
Is your college going kid more active on weekends?
New York, Aug 20 (IANS) Parents always suspect that their college going kids prefer weekends to weekdays. Now there is proof that college graduates are more active on weekends compared to non-college goers.
 
 
How brain can multitask better
Toronto, Aug 20 (IANS) Cooking while having a conversation, watching a movie while browsing the Web, or driving while listening to a radio show - multitasking is an essential skill in our daily lives. Make it better now.
 
 
 

Latest from the Network

Germany to supply arms to Kurdish fighters
Berlin, Aug 20 (IANS) Germany is prepared to supply weapons to Kurds in northern Iraq,announced Foreign Minister Frank-Walter Steinmeier Defence Minister Ursula von der Leyen jointly announced Wednesday Wednesday after...
Read more on Politics Balla
 
PTI agrees for talks with Pakistani government (Third Lead)
Islamabad, Aug 20 (IANS) The Pakistan Tehreek-i-Insaf (PTI) has agreed to talks with the government over alleged rigging of the 2013 general elections, a media report said. Senior PTI leader Shah Mehmood Qureshi told...
Read more on Politics Balla
 
Black Friday 2014 is Less than 100 Days Away
Black Friday 2014 is less than 100 days away. When is Black Friday 2014? Black Friday 2014 is on November 28th. Of course the Black Friday sales start already weeks before the actual Black Friday. Which means the first...
Read more on Black Friday Countdown
 
47 arrested in US town after fresh riots
Washington, Aug 20 (IANS/EFE) Forty-seven people were arrested overnight in Ferguson in the US state of Missouri after protestors hurled bottles at police in fresh outbreak of violence over the shooting death of an...
Read more on Politics Balla
 
Is your deodorant making your armpits smell worse?
New York, Aug 20 (IANS) Deodorants and antiperspirants are being more widely used and advertised than ever before, but did you know that they may actually make you smell worse in the long run? According to a study,...
Read more on Celebrity Balla
 
Indian found dead in Oman
Muscat, Aug 20 (IANS) An Indian national was found dead in his room in Oman, media reported. The victim, 26, who has been identified by his friends as Siby, an automobile spare parts shop salesman from Kerala, was...
Read more on Politics Balla
 
Investments pouring in from Singapore: Bengal minister
Singapore, Aug 20 (IANS) Camping here to woo investors, West Bengal Finance Minister Amit Mitra Wednesday said many companies have signed joint ventures and letters of intent promising to pump in at least Rs.1,200...
Read more on Politics Balla
 
ISAF soldier killed in Afghanistan
Kabul, Aug 20 (IANS) A soldier of the NATO-led International Security Assistance Force (ISAF) was killed in Afghanistan Wednesday. "An International Security Assistance Force service member died of wounds as a result...
Read more on Politics Balla
 
111-year-old Japanese officially declared world's oldest man
Tokyo, Aug 20 (IANS/EFE) Sakari Momoi, a 111-year-old Japanese citizen, was Wednesday officially recognised in Tokyo as the oldest man in the world by the Guinness World Records award committee. Momoi bags the title...
Read more on Politics Balla
 
Is your college going kid more active on weekends?
New York, Aug 20 (IANS) Parents always suspect that their college going kids prefer weekends to weekdays. Now there is proof that college graduates are more active on weekends compared to non-college goers. A study...
Read more on Apple Balla