Yum! Brands, Inc. (YUM) Sees Growth in China Despite Sales Decline

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Yum! Brands, Inc. (NYSE:YUM)Things are changing for Yum! Brands, Inc. (NYSE:YUM), the owner of KFC, Pizza Hut and Taco Bell, as an aggressive decline in sales is improving in its biggest overseas market, China. The fast-food giant is gradually recovering after being hit by the chicken scandal in December and the adverse effects of avian flu, which made Chinese customers stay away from KFC. Though the sales figures continued to tumble in May, the magnitude of the fall has mellowed down compared to previous months.

The Louisville, KY-based company is expected to witness further declines in the next two months, but not at such drastic rates as in the first quarter. Let’s take a brief look at the current performance of the company.

The current status

KFC continues to be a victim of the chicken scare and the bird flu outbreak, but numbers have started to rebound for the company. Yum!’s same-store sales plunged 19% for May, but the good news is that the fall wasn’t as steep as the previous month, which saw a sharp drop of 29%. KFC, Yum! Brands, Inc. (NYSE:YUM)’s largest brand in the mainland, experienced a fall of 25% in May while Pizza Hut grew 12%.

Sales in the next couple of months are expected to fall at a lower rate. UBS global equity research forecasts that Yum!’s same-store sales should plunge in the range of 10% to 15% for June. Yum! Brands, Inc. (NYSE:YUM) is positive about its future outlook in the emerging economy as the company has weathered such storms in the past as well. Patrick Grisme, Yum!’s chief financial officer, expects the company to experience a strong comeback in 2014.

Yum! is not the only sufferer

Yum! Brands, Inc. (NYSE:YUM) is not the only company caught in the blizzard–McDonald’s Corporation (NYSE:MCD) is experiencing the same difficulty in the Chinese market. McDonald’s also complained that the bird flu scare is adversely affecting its revenue from China’s emerging economy. Though the Oak Brook, IL-based company witnessed overall growth of 2.6% in May, its Asia Pacific regional performance saw growth of just 0.9%, majorly due to a revenue decline in China.

The company’s sales trend in the mainland has been negative in the past few months, but it hasn’t been much of a concern for investors. This is because only 3% of its overall operating profits comes from the region, compared to Yum!’s major chunk. The fast-food restaurant giant is concentrating on adding new value items in its menu, which include chicken wraps and egg-white sandwiches. This is also a part of its effort to effectively contend with KFC, which occupies a much bigger chunk of the Chinese appetite.

Positive outlook

Yum! Brands, Inc. (NYSE:YUM) is expected to recover in the second half of the year and to see positive trends in sales in the fourth quarter of the year. China is the most critical market for this fast-food chain as it sees tremendous growth potential in this budding economy. When an emerging economy grows, it signifies the rising disposable income of the middle class, which bolsters the growth of the quick-service restaurant industry.

In 2012, Yum! reported $13.5 billion in revenue of which more than half came from China. This is precisely why Yum! Brands, Inc. (NYSE:YUM) plans to open about 700 KFCs and Pizza Huts at different locations during the year despite the ongoing struggle.

The company was a little slow in taking action with respect to suppliers who were identified of distributing contaminated chicken but later acted aggressively and severed ties with as many as 1,000 poultry suppliers from its distribution network. Just when the company started experiencing some relief from these efforts, it got hit by the avian flu outbreak.

Chief executive David Novak is working hard to regain Chinese customer confidence in the KFC brand by ensuring that chicken is safe to eat. The company has put in huge effort to advertise and promote the safety and quality measures that it has undertaken.

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