It witnessed an aggressive decline in sales since it was hit by the chicken scandal last December. The Louisville, Ky.-based company suffered a sharp decline in the sales figures in China where customers preferred to stay away from KFC due to the avian flu. For the China division’s second quarter, sales fell 20%. Late in 2012, Yum! Brands, Inc. (NYSE:YUM) came under the microscope after it was reported that the company’s poultry suppliers were giving chickens unapproved levels of antibiotics.
Signs of improvement
In May, the sales figure for China dropped 19%, which is definitely an improvement from the decline of 29% in April. There was 12% growth in Pizza Hut. Yum! Brands, Inc. (NYSE:YUM) expects to recuperate from the decline by the end of the fourth quarter of this year. China, a critical zone for this brand, alone accounted for more than 50% of the total sales of the brand in 2012. The company is taking continual initiatives to keep its investors updated of its ongoing recovery efforts.
The company continues to take strong actions to improve the operation, and protect its brands. It has eliminated 1,000 smaller, less sophisticated chicken suppliers to control the quality and started 30-second TV commercials to promote quality assurance.
Competition
Yum! Brands, Inc. (NYSE:YUM) faces stiff competition from McDonald’s Corporation (NYSE:MCD) Both companies compete in the same food market. Over the last five years, Yum! has slightly outperformed McDonald’s, boasting a return of 74% against 65% for McDonald’s Corporation (NYSE:MCD). Yum! Brands, Inc. (NYSE:YUM) has a clear edge of a more consistent gross profit. If we shift our focus to the debt of the two companies, Yum! has increased its assets-to-liabilities ratio from slightly less than 1.0 to 1.3 over the past five years compared to McDonald’s Corporation (NYSE:MCD), which has decreased its from 1.9 to 1.8 over the same time period.
McDonald’s Corporation (NYSE:MCD) would take 2.5 years to pay off all long-term debt using annual net earnings, compared to Yum! Brands, Inc. (NYSE:YUM), which would take only 1.8 years as of 2012. Yum! has a consistent track record of financial success. It had 13% EPS growth in 2012, and in the same year it exceeded its target EPS by 10%.
In order to compete with KFC, the world’s largest chain of hamburger fast-food restaurants is concentrating on adding new value items in its menu, which include chicken wraps and egg-white sandwiches.
is a fast-food hamburger restaurant under the Burger King Worldwide Inc (NYSE:BKW) brand. It is also becoming a close competitor of Yum!. The company desires to strengthen its global footprint in growing markets. Burger King Worldwide Inc (NYSE:BKW), which runs over 12,500 restaurants globally, has teamed up with the Kurdoglu family and private equity firm Cartesian Capital Group to expand and open up new stores in China.
Currently, the Miami-based food chain has only 63 outlets in the mainland. This King has further boosted its business with wrap sandwiches, soft-serve ice cream, salads, fruit smoothies, and other new menu items that have attracted women and people over the age of 55.
Burger King Worldwide Inc (NYSE:BKW) had formed a joint venture to increase the number of outlets to 1,000 in China.
Same situation faced by McDonald’s Corporation (NYSE:MCD)
McDonald’s Corporation (NYSE:MCD) is also going through a similar situation. Due to its revenue decline in China, its Asia Pacific regional performance saw growth of just 0.9%. The company also has witnessed a sales decline in the Chinese market, but not to the extent Yum! is facing. This is because only 3% of its overall operating profits come from this region while almost half of Yum!’s profits are based in China.
It was also negatively impacted by the bird flu. May results were better than April’s, which declined 0.6%. McDonald’s Corporation (NYSE:MCD) expects to recover from this soon, and continue to grow globally.
On a positive note
Fortunately, Yum! has built an envious local supply chain that will allow it to respond to changing tastes. The business is currently focused on rebuilding its reputation, and is also considering non-traditional food items in its Chinese menu. It sees its primary opportunity among China’s middle class, which is expected to grow to 600 million people within the next decade.
Management is aiming for 14,000 locations in China just for KFC. Currently, China has one Pizza Hut for every five KFCs. If this ratio continues, investors can hope for nearly 3,000 Pizza Huts as well, bringing the total count to more than 17,000 restaurants in China — an increase of over 200% from today’s count.
Despite the ongoing struggle, the company plans to open about 700 KFCs and Pizza Huts at different locations during the year. It is working toward gaining Chinese confidence back, and ensuring that chicken is safe to eat. Yum! is engaging in promotional and advertising campaigns to boost sales in China. One may think that it may be a disadvantage for this company to concentrate most of its businesses in China. But the integral point behind this is that most of the revenue of this company comes from this region only.
The domestic market is getting saturated for these-fast food giants. So these companies are increasing their reliance on overseas diversification. Yum! is expected to create shareholder value with its recent development strategies.
Foolish wrap up
Yum! Brands, Inc. (NYSE:YUM) is positive about its future as the company has weathered similar storms in the past. It is striving to work toward a stronger business in emerging economies, particularly China (being the most profitable market for this brand). One may doubt owning this stock, but these pitfalls are part and parcel of the game, and soon this company is expected to recover its sales.
Investors may be a bit wary now, but things are going to change for the better in the near future. Yum! is also focusing on the African market, where the number of KFC outlets is increasingly on the rise. Once the Chinese market gains momentum and the African market expands, this brand will again emerge as a potential company that calls for long-term investment.
The article This Fast-Food Giant Is Expected to Recoup Its China Sales originally appeared on Fool.com and is written by Abir Karmakar.
Abir Karmakar has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald’s. The Motley Fool owns shares of McDonald’s. Abir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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