Yum! Brands fulfilled its own prophecy that sales in China would decline in the coming months. The company had anticipated a 4% drop, but now expects to see a 6% decline.
Yum! Brands is the home of KFC, Pizza Hut, and Taco Bell. KFC suffered from some negative publicity over the past quarter, which adversely impacted sales. Chinese food regulators announced an investigation into claims that the company's suppliers injected growth hormones and antiviral agents into some chicken products sold at KFC restaurants. The investigation was a hot topic among Chinese micro-bloggers. Yum attributed the sharp decline in sales to the negative publicity.
Yum has denied the claims, and has said it is cooperating with authorities and will continue to monitor the quality of food purchased from its suppliers.
China Is a Key Market for Fast Food Retailers
China is the world's second largest and fastest growing economy, and as such, is very important to fast food retailers. Yum! Brands generates more of its revenue in China than the United States (thanks in large part to the popularity of KFC). The company operates more than 4,000 KFC restaurants in China, and around 750 Pizza Huts. Last year, Yum! sales increased 21% in China.
Chief fast food competitor McDonald's (NYSE: MCD) operates around 1,400 restaurants in the country, and has plans to expand to 2,000 stores within the year. The fast food behemoth saw global sales increase 3.8%, with sales in Asia/Pacific up 2.2%, in the 2012 third quarter. In October 2012, McDonald's suffered its first monthly decline in nine years, including a decline in same-store sales in China.
Some of the decreased numbers are due to the overall economic conditions in China. The government has reported gross domestic product growth of 7.4% in the most recent quarter, a number that disappointed analysts. Historically, from 1989 until 2012, China's GDP annual growth rate averaged 9.3%.
Investors need not worry too much about the numbers in China. For the moment it seems to be a small hiccup in an otherwise healthy market. Early data indicates a return to stronger numbers in the coming months.
In mid-2012, Burger King unveiled plans to open 1,000 new stores in China over the next five to seven years, up from its current 63 restaurants.
Chickety-China the Chinese Chicken
So was KFC guilty of serving injected chicken? Findings by the Shanghai Food and Drug Administration found the level of antibiotics and steroids in the KFC chicken supply to be safe. However, there was a suspicious level of an antiviral drug in one of the eight samples tested.
