In addition, the Little Sheep chain was rumored to be connected to a fake mutton scandal that had broke out recently. While Yum!’s name has been cleared completely, the rumor leaves doubt in people’s minds. This is especially worrisome in a country like China where word of mouth can make or break the fate of any service provider.
The company is also suffering from a weak eating out environment in the US, its second largest market. Both KFC’s and Pizza Hut’s same store sales growth were negative in the first quarter. Only the strong 6% growth at Taco Bell offset the impact of the 1% decline from the two other chains and led to a 2% overall comparable stores growth for the group in the US.
McDonald’s is feeling ripples
Yum!’s chicken scandal was so potent that it not only affected its own chains but it also created a feeling of distrust for McDonald’s. And the avian flu scare has increased the pressure quite a bit.
There was little surprise when Big Mac’s China same store sales were down by 4.6% in the first quarter. The weakness continued in April and resulted in a 2.9% drop for the Asia Pacific, Middle East and Africa segment.
McDonald’s is trying to combat the challenges by slashing down prices of its chicken nuggets and emphasizing its other meat options. It is also heavily promoting fish items and its breakfast concept. But any immediate pickup in sales is unlikely.
However, McDonald’s is better placed than KFC in terms of the avian flu scare because the latter’s name itself over emphasizes its chicken menu. People often tend to forget that other protein options are also available at the chain.
Starbucks Corporation (NASDAQ:SBUX) is safe
Yum!, McDonald’s, and Starbucks Corporation (NASDAQ:SBUX) are the three biggest western restaurant chains in China. Of the three only Starbucks Corporation (NASDAQ:SBUX) is unaffected by the food-related controversies and bird flu impact. This is because the chain is still better known for its coffee than for its food offerings.
The company’s performance in the China and Asia-Pacific region remains solid. In the second quarter, revenue surged 22.3% to $213.6 million. Starbucks also posted its best comparative sales growth here. The comps surged 8%, compared to 6% in the US and a decline of 2% in Europe, the Middle East and Africa.
The chain is trying to boost its current presence in China from 800 outlets in 58 cities to about 1,500 outlets in 70 cities by 2015. The company intends to make China its second largest market after the US by 2014. It already has 61% market share in the coffee shop segment, according to Euromonitor.
So what happens to Yum!?
Yum! has already issued guidance for a mid-single digit decline in its 2013 earnings per share, but factoring in a recovery in the fourth quarter. Keep an eye on how the company’s recovery is progressing through the year. Market share will continue to be of critical importance. Given that around half of the group’s entire profits come from this region, the impact of declining sales in this market cannot be emphasized enough.
The article Trouble in China for Yum! Brands originally appeared on Fool.com and is written by Eshna De.
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