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Yum! Brands, Inc. (YUM)’s Not So Yummy Time in China

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Yum! Brands (YUM) Never Expected Being Slapped With a Rubber ChickenThe new regulation and supervision in China’s food manufacturing and processing industry has not only paused the industry’s significant growth in the past few years, but has also paused the growth of the companies who are carrying out their business operations in China. The parent company of Kentucky Fried Chicken, Pizza Hut, and Taco Bell, Yum! Brands, Inc. (NYSE:YUM), is one company that is suffering as its same store sales dropped by 6% in China. Now before analyzing the company, let’s first see what happened in China.

What’s wrong in China?

Over the past few years Chinese buyers have been facing a decline in the quality of products offered to them. There have been constant reports of finding contaminated milk or faulty car components, and this has really annoyed Chinese buyers. Finally, the authorities had to take serious steps to do a quality check of the products offered in the Chinese market. The General Administration of Quality, Supervision, Inspection and Quarantine in China has also introduced laws which hold manufacturers responsible for any faulty products offered by them in the market. This new laws have had their mark on different companies, and Yum! Brands is no exception.

Effect on Yum!

The goodwill of Yum! Brands, which operates thousands of KFC restaurants in China, has suffered badly during the investigations by the Chinese food regulations which took place after media reports alleged that excess antibiotics and hormones were found in some chicken products sold at KFC outlets. After this negative publicity, sales declined sharply as Chinese consumers refused to visit KFC stores.

The company that got about 44% of its revenue from China last year reported a significant decline in their KFC sales in its fourth quarter earnings. Net income for the fourth quarter slipped to $337 million from the net income of $356 million that the company earned last year as the same store sales in China declined 6%. However, Yum! is definitely not the only company that is suffering. Companies across all segments, ranging from carmakers to dairy importers, are facing a pinch of the newly laid rules in China. Recently, the world’s largest automaker, Toyota Motor Corporation (NYSE:TM), had to recall 22,869 Lexus cars in the country because those cars had defects with windshield wipers. This was quite a loss for the company, who was already suffering after their September sales tumbled 49% in China as the Chinese consumers were not willing to buy Japanese cars due to the territorial dispute between Asia’s two largest economies.

While Yum! suffered in China due to this latest food scandal, its business in other parts of the world did pretty well.

What about other regions?

Yum!’s same store sales increased 3% in US, 24% in India, and 3% at other international stores. To increase sales in the US, the company has come up with some new advertising strategies to attract budget-conscious customers. Yum! has also come up with some new pricing strategies to survive in the competitive market. Its competitor McDonald’s Corporation (NYSE:MCD) introduced their dollar menu in the US, thanks to which the company’s sales rebounded, resulting in a 1.4% rise in their fourth quarter profit. Soon after MCDonald’s started advertising their dollar menu, to attract budget constraints customers, Pizza Hut came up with its $10 for any pizza and $19.99 for a big dinner box campaign. Taco Bell has also introduced a 12 pack of tacos. With all these new marketing strategies the company successfully boosted its top line.

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