Yum Brands: It Could Be 9 Months Before We Recover in China
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When news broke this summer that one of its suppliers in China was using expired meat, Yum Brands knew things were about to get rocky – and not just from "worst-case scenario" research.
The parent company of KFC, Taco Bell and Pizza Hut had been there before. In late December 2012, Chinese food investigators found that Yum's suppliers had sold KFC higher-than-permitted levels of antibiotics. On the heels of the antibiotics investigation, avian flu swept China, further damaging consumer confidence and dragging down sales. In the first quarter of 2013, Yum same-store sales declined 20 percent in China.
The latest crisis, which surfaced in July, has been an unwelcome déjà vu for the company. In its third-quarter earnings report, released Tuesday, Yum saw a 14 percent same-store sales decline and an almost 10 percent drop in revenue in China. The company reported lower-than-expected profit and revenue, and now expects annual earnings-per-share growth of 6 to 10 percent, down from a previous projection of at least 20 percent.
In its earnings call on Wednesday, Yum Brands CEO David Novak said the company was relatively early in its recovery, and that it will take six to nine months to rebound from the events in China. "No two crises are ever the same," he said, in response to a question on Yum's 2014 and 2012 chicken-supplier scandals. "However, I would say this trend is broadly in line with what we saw last time."
McDonald's, which was and (unlike Yum Brands) continues to be supplied by the same meat company, has also struggled to bring in customers since the scandal unfolded.
This time around, Yum says it was able to take swifter action. The fast-food conglomerate responded especially speedily to social media outcry. "I can't say we'll never have an incident like this again," Novak said in the call. "But I can say we get stronger."
Just before the latest scandal, Yum was on a roll, especially in China. The company started off 2014 with two strong quarters driven by success in China, and announced plans to open at least 700 restaurants there this year. China's rapidly growing middle class and supersized slice of the global economy make it a huge opportunity for Yum, which currently operates more than 4,600 KFCs and 1,300 Pizza Huts there.