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What, Other Than Chicken, Is Scaring Yum! Brands, Inc. (YUM)’s Growth In China?

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Yum! Brands, Inc. (NYSE:YUM)Yum! Brands, Inc. (NYSE:YUM), the most popular Western food chain in China, recently reported a 29% drop in same-store sales in its biggest overseas market. The concern over its chicken and the latest outbreak of the avian flu are making customers stay at arm’s length from Yum! Brands, Inc. (NYSE:YUM)’s KFC outlets. The company’s management is working hard to regain the previous reputation and win back consumer confidence in the KFC brand.

China is an extremely crucial market for Yum! Brands, Inc. (NYSE:YUM), where it runs 4,400 KFC and around 1,000 Pizza Hut locations. Other than this, the company also operates two Asian chains:  East Dawning and Little Sheep. However, the chicken scare has hit the company’s revenue terribly.

The story in short

In December 2012, the food regulatory agency in China identified inappropriate levels of antibiotics in the company’s chicken supply. The quick-service restaurant chain apologized to its Chinese customers in a letter dated January and also aired a commercial focusing at the company’s commitment to quality and safety. However, the message will take time to sink in before consumers start visiting KFC at previous levels.

The chicken alarm was reflected in the company’s first-quarter revenue. But the good news is that Shanghai food-safety regulators recently cleared Yum! for quality issues at its Little Sheep Group. However, just when sales started recovering in March, the company got caught in the H7N9 bird flu scare and KFC restaurants are again under scrutiny.

If we dig a little deeper, the chicken issue is not the only challenge that Yum! Brands, Inc. (NYSE:YUM) is encountering in the mainland. There are other problems that are threatening the company’s growth in its most lucrative market.

Change: Need of the hour

The company claims that negative publicity is pulling down its revenue and profits, but there are other issues that demand a look. Yum!’s KFC outlet became the largest food chain in the emerging economy as people loved its fried chicken and enjoyed the prestige of visiting an American outlet. Yum! Brands, Inc. (NYSE:YUM)’s main strategy to expand in China was to blend in the local population’s taste by offering customized food. And for a while this worked for the Louisville, KY.-based fast food giant compared to arch rival McDonald’s Corporation (NYSE:MCD), whose foothold in China isn’t as strong.

But now things are evolving in the mainland and Yum! isn’t changing at the same pace. The appearance of the outlets hasn’t been changed, the menu has become excessively localized and lacks the American touch, which was one of the reasons that drew huge crowd to the outlets. The effort to offer more local dishes has overshadowed the American identity.

“It hasn’t evolved with how consumers want to eat,” said Mary Bergstrom, the founder of Bergstrom Group, a consulting firm based in Shanghai, according to published reports. The company is not keeping in pace with the rising classiness of Chinese eateries. Further, it is struggling to contend with the local rivals that are growing at a fast rate.

Increasing competition

Yum! is experiencing stiff competition from domestic food chains that are duplicating dishes offered at KFC. Country Style Cooking Restaurant Chain, a Chongqing-based quick-service chain, offers a lunch package of fried chicken and rice, which is not only cheaper but is also prepared to suit local taste buds. Other chains such as Dicos, which is owned by Ting Hsin International Group, and Hua Lai Shi, serve deep-fried chicken and other side dishes that include chicken burgers, chicken bites and wraps. These domestic chains have rigorous expansion plans.

Not only are these players making things difficult for Yum! Brands, Inc. (NYSE:YUM), but the company’s domestic rival Burger King Worldwide Inc (NYSE:BKW) is also trying hard to set up a stronger operation in the emerging nation. Burger King Worldwide Inc (NYSE:BKW) proposes to have 1,000 stores in the country in the next five-to-seven years.

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