Exploring the emerging market
Not only Yum!, but both McDonald’s Corporation (NYSE:MCD) and Burger King Worldwide Inc (NYSE:BKW) have plans for international expansions, particularly in the emerging markets in Asia Pacific with keen eyes on China. By the end of 2012, Burger King Worldwide Inc (NYSE:BKW) had only 86 outlets in the Chinese mainland. It formed a joint venture to increase the number of outlets to 1,000 in China.
Other than opening restaurants in China, both Yum! and Burger King Worldwide Inc (NYSE:BKW) are exploring other emerging markets as well, particularly as the fast-food industry scenario appears pretty challenging in the domestic market. Burger King got its first outlet opened in Cape Town, South Africa and proposes to open 12 outlets in South Africa in the coming year. McDonald’s Corporation (NYSE:MCD) entered South Africa way back in 1995 while Yum! Brands, Inc. (NYSE:YUM) has been in this market for the past 42 years. Yum! is also focusing on the African market, where it expects to grow “exponentially” as the number of KFC outlets have increased at a rapid pace.
The bottom line
Overseas expansion is one of the avenues that fast-food giants like Burger King and Yum! are looking for, as the domestic market is getting saturated. Accordingly, Yum! is working to set up a stronger business in emerging economies with a prime focus on China, which is its biggest and most profitable market. China has been the key to Yum!’s success in the past few years and undoubtedly stands to be the most essential market in at least the next few years. Setbacks are part of the game, and the company is gradually recovering in China.
Quality programs, as well as promotional and advertising campaigns, are some of the aggressive techniques that Yum! is adopting to boost sales in China. This shall weigh on its profit margins because of rising costs. However, as China accounts for a huge chunk of the fast food giant’s top- and bottom-line performance, such expenses do not remain optional. China is Yum!’s key to success.
Yum! Brands, Inc. (NYSE:YUM) must be appearing like a questionable stock to own but I believe its strength and penetration in the emerging markets are positive signs indicating future growth. The company has witnessed a similar situation concerning the avian flu in the past and has recovered. Although Chinese consumers may be a little panicky now, they will soon embrace KFC. In fact, Yum!’s expansion in different markets, particularly China, is its biggest strength for future growth. The stock might appear a bit overvalued given the tough situation in China; however, I see considerable potential and feel that it is a solid long-term investment once the Chinese market regains momentum and the African market expands further.
The article Yum! Brands Sees Growth in China Despite Sales Decline originally appeared on Fool.com and is written by Rajesh Marwah.
Rajesh Marwah 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. Rajesh 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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