Yum! Brands Continues to Expand in China

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Yum! Brands (NYSE: YUM) is recovering from the bird flu and continues to expand in China. Yum! Brands, a quick-service restaurant company with 38,000 locations in more than 120 countries, has three strong global brands, including KFC, Pizza Hut, and Taco Bell. With its improving sales number, the bird flu effect starts to ease.

Bird flu update

In its recent regulatory filing, Yum! Brands indicated same-store sales for its Chinese operations fell by about 19% in May, including an estimated 25% drop at KFC locations and a 12% increase at Pizza Hut restaurants. The May sales number was in-line with analysts' estimates, according to Consensus Metrix.

In April, Yum! Brands’ Chinese sales were down 29%, while KFC dropped 36% and Pizza Hut increased 5%. The company expects China restaurant sales to continue recovering and to turn up in Q4. With the uncertainties in China, the management is expecting a mid single-digit EPS decline in 2013.

What is Yum! Brands doing?

The company continues to take strong actions to improve the operation and protect its brand names. As indicated by Chief Executive David Novak, Yum! Brands has eliminated 1,000 smaller, less sophisticated chicken suppliers to control the quality and started 30-second TV commercials to promote quality assurance. The company initiated a strong decisive action with the launch of Operation Thunder.

Strategically, the company is shifting its development focus to Tier 3 cities (smaller cities that ranked below 30 based on population). Between now and 2020, there will be 200 million more people in the consuming class in China, where 70% of those individuals are estimated to reside in cities that are grouped as Tier 3 and smaller. 

As compared to major competitor McDonald’s, Yum! Brands has a fourfold advantage in the number of restaurants in Tier 3 through Tier 6 cities, and the company continues to drive sales in those markets.

Global competition

McDonald’s is also negatively impacted by the bird flu. It experienced a decline in China sales for May. Despite the drag from China, May sales at the established restaurants increased 2.6% globally for McDonald’s, which is better than the 1.9% expected by the analysts. The Dollar Menu and breakfast items helped drive the U.S. business.

McDonald's has introduced new products such as chicken McWraps and egg white McMuffins while expanding its test of a late-night breakfast menu. Consequently, May results were better than April’s, which declined 0.6%. By focusing on its three global growth priorities, including optimization of the menu, modernization of the customer experience as well as broaden accessibility, McDonald's should quickly recover from the bird flu and continues its growth globally.

On the other hand, Burger King Worldwide (NYSE: BKW) and Wendy’s (NASDAQ: WEN) have rolled out a broad variety of special menus and value deals. They have deployed similar business strategies of store renovations and extended hours to stay competitive.

Burger King, as the second largest fast-food hamburger chain in the world, continues to accelerate its international development and implement its re-franchising initiative. Once Burger King reaches 100% franchise business model, its will be one of the few pure play franchisor/real estate companies in its peer group with enhanced cash flow. By improving its financial position, similar to Yum! Brands, Burger King will accelerate its expansion globally, as demonstrated with its recent push into South Africa.

To stay competitive, Wendy's has been revamping its restaurants and will have 200 refreshed stores this year and 400 in 2014. The company forecasts growth of 2% to 3% for 2013 while same-store sales at company-owned restaurants increased 1% in Q1. By focusing on improving same-store sales instead of growing store numbers and managing its cost effectively, Wendy's is expected to improve its profit margin and offer more value for investors.

Bottom line

While Yum! Brands has been negatively impacted significantly by the bird flu in China in April, it showed signs of recovery in May. Yum! Brands’ major competitor, McDonald’s, also suffered from a decline in sales in May. Both are expected to recover from the bird flu, which has a history of being short-lived.

However, the competition for the fast-food market continues to heat up as major players continue to roll out new products and services. While Yum! Brands gets hit the most during the bird flu, it is expects to benefit the most once the sickness issue is settled as the company continues to strengthen its food supply control and expand its operation in Tier 3 and smaller cities.

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Nick Chiu has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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