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Embattled hoteliers and restaurant operators whose business has been hit by China’s H7N9 bird flu outbreak are finally getting some relief with Shanghai’s formal cancellation of its bird flu emergency after the city went 3 weeks without any new cases. (English article) But companies could continue to feel the fallout from the scare for at least the next few months, with by Yum’s (NYSE: YUM) KFC perhaps the most vulnerable to longer term damage. Read Full Post…
The latest stomach-churning results from fast food giant Yum (NYSE: YUM) are a good opportunity for an updated look at the impact that bird flu is having on companies that rely on the restaurant and travel industries in China. Somewhat ironically, these latest dismal results from the operator of KFC and Pizza Hut restaurants actually sparked a rally in Yum shares, since many were expecting the figures to be even worse than they were. Read Full Post…
KFC and Pizza Hut owner Yum Brands (NYSE: YUM) has banked on the China story for much of its growth over the last decade, building itself into one of the world’s biggest China plays by deriving more than half of its revenue from the fast-growing market. So it was almost inevitable that the company would take a big hit when the China market started to stall, which is exactly what has happened in Yum’s latest earnings report. That report saw Yum make the somewhat shocking announcement that its China same-store sales to fall around 4 percent in the fourth quarter from year-ago levels. (English article)
I was pleasantly surprised today to read that Denny’s (Nasdaq: DENN), one of my favorite US diner chains, is testing the Asia market with plans to open restaurants in China, part of a broader move that is seeing mid-sized restaurant chains pile into the market in a bid to copy the success of top names like KFC (NYSE: YUM) and McDonalds (NYSE: MCD). I also like the fact that Denny’s, known for its 24-hour breakfast menu, is taking a go-slow approach to China, with plans to open a modest 50 stores in the country over the next 15 years through a joint venture with local partner Great China International Group. (company announcement)
The big boys like KFC, McDonalds (NYSE: MCD) and Starbucks (Nasdaq: SBUX) aren’t the only ones hoping to feast on China’s growing appetite for fast food, with 2 mid-sized players, ice cream specialist Dairy Queen and Pizza Hut also announcing big new expansion plans to cash in on the trend. For investors, these expansions by smaller players spotlight that China offers interesting potential for not only the big names, but could also make mid-sized players an interesting bet. Then again, these more mid-sized companies come with a bit more risk, as they often lack the resources of the bigger names to execute their expansions, and are more likely to withdraw from the market at any signs of trouble, creating potentially big losses. Let’s look first at Dairy Queen, a well-known US brand that has been quietly expanding in China over the last few years. The company, owned by billionaire investor Warren Buffett, recently opened its 500th store in China, and says it plans to add another 100 stores by the end of this year, after opening 131 new stores in 2011. (company announcement) Meantime, Pizza Hut, owned by Yum Brands (NYSE: YUM) has announced it will open at least 150 new stores this year as it expands into third- and fourth-tier cities, part of a trend that is seeing restaurant operators move into smaller, less affluent Chinese cities in pursuit of growth. Both Pizza Hut and Dairy Queen represent a group of lower-profile foreign restaurant operators that have found varying degrees of success in China, joining other similar sized players like Japan’s Yoshinoya, Hong Kong-listed Ajisen (HKEx: 538) and US pizza chain Papa Johns (Nasdaq: PZZA). A key component to the success for both the larger and smaller players is finding a strong Asia partner to help navigate the often tricky China market, where foreign companies are often subject to much more scrutiny than local companies. Ajisen got a good lesson in the potential perils of the market last year, when many Chinese consumers boycotted the chain after it falsely claimed that its soups were made with fresh ingredients, dealing a huge blow to the company’s revenue. Negative campaigns like that could easily force some of these smaller companies to incur big losses and even withdraw from the market, spotlighting one of their biggest vulnerabilities. But if they have the right partner and backing, some of these companies could also look like strong bets to profit from China’s growing appetite for western fast food.
Bottom line: New expansion plans by Dairy Queen and Pizza Hut in China spotlight the market’s big potential for mid-sized fast food companies.
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A new flurry of reports about mislabeled products at some of Wal-Mart’s (NYSE: WMT) China stores would be almost comical if they weren’t true, spotlighting just how sensitive the issue of food safety and false advertising has become in the country. The latest media reports say some Wal-Mart store managers have been detained and more than a dozen stores temporarily closed in this new crisis. And the reason for all the brouhaha? Believe it or not, it’s all because someone discovered that some pork products were falsely labeled as “organic” when in fact they weren’t. (English article) Don’t misunderstand me, I’m quite against the mislabeling of products, especially when such practices could result in health hazards to consumers. But in this case, there doesn’t appear to be any immediate health hazard, and the detention of employees over this kind of minor misdeed seems like a bit of an overreaction. All of this is no doubt part of Beijing’s desire to show it is taking false advertising and food safety very seriously, following a steady stream of much bigger scandals in the last 3 years that have sickened and even killed victims who ate unsafe and tainted food products. This kind of high-profile campaign carries big risk for companies like Wal-Mart, which will now face backlash from Chinese consumers. Hong Kong-listed Japanese noodle chain Ajisen (HKEx: 538) has experienced first-hand this kind of backlash, as its business has dropped dramatically since Chinese media recently exposed that its soups were made using packaged powder rather than fresh ingredients as the company had advertised. Its shares have lost about half their value since the scandal erupted in July. Wal-Mart, which is China’s second biggest supermarket operator, now faces similar fall-out, and other major chains like recently listed Sunart (HKEx: 6808) and Carrefour (Paris: CARR), China’s largest and third-largest supermarket operators, will also be exposed to similar risk. Restaurant operators like KFC parent Yum Brands (NYSE: YUM) and McDonalds (NYSE: MCD) will also be vulnerable, as Beijing looks for more high-profile targets to chase to ease broader public concerns over food safety and false advertising.
Bottom line: Major food-related firms will be highly vulnerable to negative publicity campaigns in the next 2-3 years, as China tries to ease public concerns over food safety and false advertising.
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