Yum’s China Salad Days In the Past? 百胜集团在中国的高速扩张终结?

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)

That’s right, Yum said that sales would actually decline for the quarter, marking a sharp contrast from the past when same-store sales nearly always grew, often by healthy double digit amounts. Shareholders certainly didn’t like the news, with Yum shares plunging 10 percent after the downbeat forecast came out, their worst single-day fall in a decade.

Even with that drop, its important to point out that long-term investors in Yum have still made quite a handsome profit from the company’s stock, largely thanks to a booming China growth story. Someone who purchased the company’s shares in 2000 would have earned an 8-fold return on that investment over the last 12 years as China rose over that time to become the company’s most important growth market amid slowing sales at its home based in the US.

After opening new KFCs in China at a breakneck pace over the last decade, Yum now operates a staggering 4,000 stores in the market, accounting for a dominant 40 percent of China’s fast-food sales. By comparison, the second largest player, McDonalds (NYSE: MCD) operates just 1,300 stores in China, giving it about 16 percent of the market.

Analysts were quick to point out that McDonalds and other fast food operators like Japanese noodle chain Ajisen (HKEx: 538) are also suffering similar effects to Yum due to China’s broader economic slowdown. But I suspect that Yum’s problems are probably deeper than many of its peers, and that perhaps the company’s decade-long streak of strong growth in China is probably near the end and unlikely to return anytime soon.

Yum has already made several moves over the last year that signal its China growth story is running out of steam, largely due to saturation of its stores in the market. The company has announced a number of new initiatives aimed at keeping its growth story alive, including a tie-up in May that would see it  open stores in stores run by consumer electronics giant Suning (Shenzhen: 002024). (previous post) Late last year, Yum also announced it was forging another new relationship with oil major Sinopec (HKEx: 386; NYSE: SNP; Shanghai: 600028) to open restaurants in gas stations. (previous post)

I previously said that both of these initiatives showed that Yum was increasingly desperate for new business opportunities after building out a national network that already included stores in most of the most profitable locations. I suspect that many of these new stores opening in locations like gas stations and electronics stores, as well as in smaller cities where consumers have less spending power, are hurting Yum’s broader performance and may even have to be closed before too long.

That kind of development shouldn’t come as a surprise to anyone, since 40 percent share of a major competitive market the size of China’s is already a huge number and one that’s unlikely to go much higher. Thus even if China’s economy soon starts to improve, which a growing number of people are now predicting, the end of this new and unusual gloomy period for Yum could last for quite a while longer.

At the very least, I would say that the company’s ambitious China expansion has most likely peaked, and that its KFC store count will probably remain at 4,500 or less for at least the next 3-4 years. At the same time, many of these newer stores in less profitable locations will probably bring down the company’s overall performance in the next few years, with same-store sales likely to return to a growth track next year but at a much slower rate as China’s economy improves.

At the end of the day, Yum’s China story will remain important to the company’s overall performance in the years ahead since the country does account for more than half of its sales and operating profits. But the days of Yum’s China-fueled heady growth are most likely in the past, both for the company’s top and bottom lines, as well as for its turbocharged stock.

Bottom line: Yum’s turbocharged China expansion has most likely ended, with the company likely to settle into growth patterns more like those seen in mature markets like the US.

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