Yum Brands 5% Sales Slide in China During October Not as Bad as Expected; KFC Still Coping with Negative Publicity, While Pizza Hut Revenues Rise 10%
October same-store sales for Yum! Brands, Inc. fell an estimated 5% within its China Division. This included an estimated decline of 7% at KFC and 10% growth at Pizza Hut Casual Dining, the Louisville, Kentucky, USA-headquartered company revealed in a filing with the US Securities and Exchange Commission on November 12.
The sales slide was less than anticipated, as third quarter results for the period that ended on September 7 showed an 11% decline in same-store sales in China. During the same time frame system sales fell 2% in China and were flat in the USA, while worldwide system sales edged up 1%.
Yum revised its full-year outlook after analyzing third quarter results, stating: “Based on KFC China sales for September, it is now unlikely China Division same-store sales will be positive for the fourth quarter. Given lower-than-expected China sales and a higher-than-expected full-year tax rate, the company now estimates a high single- to low double-digit full-year EPS decline versus the prior year, excluding special items.”
David C. Novak, chairman and ceo of Yum! Brands, expressing optimism about the future, commented: “Despite the disappointing third quarter performance, I remain as confident as ever in our ability to deliver strong, sustainable growth in the years to come…Even with our recent challenges, KFC is unquestionably the category leader in China and we remain confident sales will fully recover from the adverse publicity surrounding the December poultry supply incident.”
The “supply incident” Novak referred to involved TV and other media reports claiming that some chicken products on the menu were sourced from poultry farmers using unapproved levels of antibiotics. The impact from this negative publicity was largely attributed to the fall in sales at KFC outlets throughout much of the year. But while the decline was pegged at 13% in September, the October drop in same-store sales was almost halved to 7%.
Of course there are more factors to be considered as well, ranging from ongoing concern about an avian flu outbreak in the spring, a decline in confidence among consumers coping with inflation and other economic issues, and rising competition from local restaurant chains such as Hua Lai Shi and Dicos.
With sales in China accounting for more than 40% of Yum’s business, it is stepping up KFC advertising in the PRC to emphasize food quality assurance and promote new products such as beef burgers. If consumers can again be fully convinced that its supply line is safe and secure, Novak sees a “strong bounce back year in 2014.”
“Even with our recent challenges, KFC is unquestionably the category leader in China…Our Pizza Hut business continues to deliver strong results, and the rest of Yum! Is performing as expected for the full year,” said the chairman and ceo.
Indeed, KFC quick service restaurants accounted for 4,463 out of 6,035 Yum! Brands units in China by the third quarter of this year. Most of the other operations are Pizza Hut and Little Sheep outlets.
Novak reported that the company “will open at least 700 new units in China during 2013, as we capitalize on the world’s fastest growing consuming class.”
Outside of China, Yum! Restaurants International in on a fast track opening stores in India. “When you add it all up,” calculated the chairman and ceo, “we will open at least 1,850 new restaurants outside the US, further strengthening our leadership position in emerging markets. In addition, we will have new-unit growth in the US for the second consecutive year.”
Globally, Yum! Brands operates over 40,000 restaurants in more than 130 countries and territories. With revenues of over $13 billion in 2012 and 2013, it is ranked No. 201 on the Fortune 500 List. In addition to KFC, Pizza Hut and Little Sheep, the company’s restaurant brands include Taco Bell, a leader in the Mexican-style fast food category.