Yum! Brands, Inc. (YUM), McDonald’s Corporation (MCD): Is the Chicken Issue Turning Into a Disaster?

Number One Growth Opportunity Tarnished

Yum! Brands, Inc. (NYSE:YUM) made it quite clear that China is its primary growth focus. CEO David Novak called China the company’s “number one growth opportunity in the world.” In 2012 the country accounted for 42% of the company’s profits. The size of the country and its quick ascent toward developed market status are clear reasons to be optimistic. And for years, Yum! Brands, Inc. (NYSE:YUM)’s focus was well rewarded. However, since mid 2012 bad news out of China has been the norm.

Chicken Issues

In late 2012 a couple of the company’s suppliers were accused of selling chicken that didn’t live up to the government’s quality regulations. Yum! wasn’t accused of wrongdoing, but its image was sorely damaged. Sales at KFC plummeted, with January same store sales off by a massive 40%. Pizza Hut, tarnished by association, saw sales fall 15%. At that point, the CEO warned that Yum! was likely to fall short of its 2013 goals.

As if that weren’t enough, an outbreak of avian flu in early 2013 added fuel to KFC’s fire. March same store sales at KFC were down 16%. That’s bad, but a massive improvement over the 40% January decline. Sadly, those numbers didn’t include the avian flu impact, which brought April sales down 36% at KFC. The numbers are again headed in the wrong direction. Luckily, Pizza Hut saw a 5% sales increase. It’s too bad that there are four times as many KFCs in China as Pizza Huts.

First quarter earnings declined 8% largely because of the problems in China. Although the company asserts that the chicken quality issue is likely to be short lived, with such steep sales declines, it could be a year before KFC returns to sales growth.

Bigger Issues?

Meanwhile, Bloomberg recently ran an article hinting that KFC’s problems go beyond chicken quality. The article suggests that KFC has veered too far toward Chinese food in an attempt to attract customers. That, in turn, has left it with an undifferentiated product at the very time that competitors are increasingly mimicking its fried chicken offering.