A new announcement from KFC parent Yum Brands (NYSE: YUM) is interesting for what it doesn’t say, spotlighting the fact that the company would prefer not to talk about the many difficulties it has recently faced in China. Anyone who has followed the KFC story closely over the last decade will know that China featured prominently in many of Yum’s announcements during that time, as the market posted consistent double-digit gains that helped to boost Yum’s profits by similar amounts. But lately those gains have evaporated, and KFC has now posted same-store sales declines in China for much of the past year. What’s more, Yum keeps extending its timeline for a recovery, which now isn’t expected until next year at the earliest.
All that said, let’s take a look at the latest Yum announcement that trumpets the opening of the 40,000th KFC globally as a major company milestone. (company announcement) I fully agree with this view, as few if any other retailers can boast the presence of so many stores across the globe. But the announcement is equally interesting for where the landmark 40,000th store opening was located, namely in the city of Goa in India. Just a year or two ago, Yum almost certainly would have chosen China as the location for the new store opening to celebrate this major milestone.
In the announcement, Yum says it chose the India store for the milestone to spotlight the importance of developing markets to its global expansion. It said it plans to have 1,000 stores in India by 2015 in more than 100 cities, and will post annual sales there of $1 billion by that time. It adds it plans to invest $10 billion in emerging markets by 2020. Mention of “China” doesn’t occur even once in the announcement, despite the fact that China is Yum’s largest developing market and accounts for more than half of the company’s profit.
Yum’s China story could well provide a look at how things might develop for other major multinationals that hold out such big hopes for China. The company was the first major foreign restaurant operator to come to the market with the opening of a KFC at Beijing’s Tiananmen Square in 1988. (previous post) Since then it has rapidly expanded and it now has more than 4,000 stores in the market, or more than a tenth of its global total.
But in the process of such rapid expansion, Yum has suddenly discovered that it is running out of places to grow. It has experimented with several new concepts, including placement of outlets in electronics stores operated by electronics retailing giant Suning (Shenzhen: 002024) and gas stations operated by Sinopec (HKEx: 386; Shanghai: 600028; NYSE: SNP). But despite those efforts, its sales have shown signs of longer term stagnation.
A steady stream of scandals and other issues have added to its problems. Over the last 12 months, the company has been the subject of 2 scandals involving excessive antibiotics in some of its chicken, and also high bacteria levels in its ice cubes. It also took a major hit this past spring when Chinese stopped eating at its restaurants at the height of a bird flu outbreak centered around Shanghai.
The company warned earlier this month that a recovery in China will now take longer than previously expected, with a return to positive growth unlikely before next year. Its third-quarter same-store China sales dropped 11 percent, and the fourth quarter was getting off to a similar start. I previously said that Yum’s days of explosive China growth could well be in the past, and this latest announcement trumpeting the potential of India could show that Yum itself also privately harbors a similar view.
Bottom line: Yum’s focus on India in a major new milestone announcement reflects its diminished expectations for China, as it struggles to return to same-store sales growth in the market.