The signs of economic slowdown in China are growing louder by the day, but you would never know it from looking at the latest bullish news from 2 of the country’s top restaurant operators, Yum Brands (NYSE: YUM), operator of the KFC and Pizza Hut chains, and upscale coffee seller Starbucks (Nasdaq: SBUX). It seems like the Chinese papers are filled these days with more forecasts of gloom as China’s exporters take a hit from sluggish demand in their 2 biggest markets, the US and most notably the European Union as it struggles through its debt crisis. Today the papers reported that retail sales during the week-long Chinese New Year holiday posted their weakest gain since 2009 at the height of the financial crisis. Despite that, Yum reported that sales at its China restaurants, consisting mostly of KFCs, grew 21 percent in the fourth quarter, while its operating profit for the country was up 15 percent, far better than the figures for its global business as a whole. (English article) While Yum was announcing its strong China sales, Starbucks was also announcing its own latest China initiative, this time a joint venture with a local Chinese partner to export coffee from southwestern Yunnan province, China’s only coffee growing region. (company announcement) This particular announcement looks a bit PR-ish, clearly designed to show Starbucks’ commitment to a market that is showing every sign of soon becoming its second biggest behind only the US. Still, the joint venture could actually earn some money from other markets interested in the exotic factor of buying coffee from China, not traditionally known for its coffee. What will be interesting to watch in the months ahead is whether both KFC and Starbucks start to see some of their spectacular China growth slow as the nation’s broader economy slows down. I expect we may see some mild slowdown, but that the strong growth should largely continue unabated. The phenomenon is similar to what we’re now seeing in the auto industry, where overall growth has slowed sharply after Beijing ended many incentives to boost that market. But within the industry, domestic automakers have seen their growth drop much more rapidly than their international rivals, which have more resources to survive the downturn and enjoy a better reputation in the market. I suspect something similar will happen in the restaurant sector, with independent eateries set to suffer the most in the coming slowdown, while the big chains will be better equipped to weather and even thrive in the storm.
Bottom line: Yum, Starbucks and other major restaurant chains should be able to keep up strong growth even as China’s economic growth slows, while local eateries will be hit hardest.
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