Yum! Brands Inc (YUM)….KFC’s Fall Back Plans

Yum! Brands, Inc. (NYSE:YUM)KFC’s cash cow China will take time before it can reach its historic levels. Sales are still down following the chicken scandal. KFC’s parent company Yum! Brands, Inc. (NYSE:YUM) which also owns Pizza Hut and Taco Bells has the largest presence in China amongst all its US peers with more than 4,000 KFCs and 750 Pizza Huts. The company is trying hard to chalk out new strategies to counter the China declines.

In a recent move the company has announced a big expansion drive in UK and Ireland. It has also launched its new ‘Li’l Bucket’ for kids with hopes of doing what McDonald’s Corporation (NYSE:MCD) did with its ‘Happy Meals’. But is this enough? And what happens to China?

UK and Ireland expansion
Yum has announced a big expansion drive for KFC in the UK and Ireland. It will add over 40 new outlets in the two countries and remodel another 160 more. The company will spend some £80million on the entire initiative with the cost equally divided between the new additions and re-modeling. This will increase the number of KFC stores to around 900.

Ultimately Yum intends to have around 1200 outlets in the UK and Ireland. Despite the economic slowdown sales trends have remained quite positive for KFC. In fact it has witnessed seven consecutive years of same store sales growth in the UK. The new outlets should see decent sales too.

It looks like the fast food chains are holding their ground well in the UK. McDonalds is witnessing good sales as evidenced by the 2.5% sales increase in Europe in February which the company has attributed to the UK and Russia. Dominos Pizza has also reported that its February deliveries are up by 10%.

Li’l Bucket for kids
Back home KFC has recently launched its ‘Li’l Buckets’ for kids. The menu priced at $3.99 contains a chicken, a side, a beverage together with applesauce. However, how much this new addition will drive sales is dubious.

Firstly the popularity of kids menu is waning in recent times. Market Research Company NPD Group attributes this to the decline in the number of parties and families that visit restaurants with kids. It has found out that in 2006 there were 17 billion visits to fast food restaurants by parties with kids. The number has fallen to 15 billion in 2012.

Secondly there is much uproar from the nutritionists lobby against the poor nutrition value of the kid’s meals. The Center for Science in the Public Interest or CSPI has recently published a report in which it has highlighted that 97% of kids meals offered in chain restaurants do not meet the prescribed CSPI standards (found in Table 2 of the report).

Other than Subway there is not a single other chain that has been found to be complying with CSPI nutrition criteria for four- to eight-year-olds. From McDonalds to Burger King Worldwide Inc (NYSE:BKW) everybody has received the flak and so has KFC. KFC’s Li’l Bucket too does not meet the CSPI criteria.

Situation at China
Post the chicken scare the news from the middle kingdom is not yet reassuring although it looks like some KFC fans are coming back. There was a 20% slide in same store sales in January and February but it was better than the 25% drop analysts had predicted. In fact February had witnessed flat same store sales growth for KFC and a 13% rise for Pizza Hut. Yum sticks to its plans of opening 700 new outlets in 2013.

It is not a good time for Yum to take a backseat in China. With growing demand for western food all big quick service restaurants or QSRs are counting on China for their growth. The Chinese fast food market is estimated to be almost $29 billion.

McDonald’s has aggressive expansion plans and is aiming to have 2000 restaurants by the end of 2013. The company is enjoying good sales in China driven by breakfast, lunch, and dinner value platforms. It is strategically balancing the value initiatives with mid-tier offers like Bubble Tea.

In February same store sales for Asia Pacific, the Middle East and Africa fell 1.6%, slightly less than the 1.7% drop analysts were expecting but that had more to do with Japan.