Yum! is Trying Hard to Fix It
Satarupa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I always knew Yum! Brands (NYSE: YUM) won’t give up on China so easily! The company suffered a 6% decline in its fourth-quarter same store sales in China due to the recent food safety issues. But the company had to do something to gain back its customers’ confidence in China, from where it got almost 44% of its revenue last year, and Yum! is surely on the right track.
What went wrong last quarter?
After the new regulation and supervision in China’s food manufacturing and processing industry started, media reports alleged that excess antibiotics and hormones were found in some chicken products sold at KFC outlets. Though Yum! was not fined by the Chinese food safety authorities, but due to this negative publicity, Chinese consumers completely stopped visiting the KFC stores as a result of which the company faced a sharp decline in its fourth-quarter sales.
Though Yum!’s same store-sales increased 3% in the U.S., 24% in India, and 3% at other international stores, driven by their new advertising and pricing strategies to attract budget-conscious customers, the falling numbers in China washed away most of the shine from its throne. Yum!, which operates with a total of 38,200 restaurants worldwide, could report 1% rise in their overall revenue.
So obviously, Yum! had to take some measures to gain back customers confidence in China, as it has always been a very important market for the company.
Steps taken for fixing it up:
Yum! is fighting hard to re-establish its battered image in China. The company has announced that it would undertake steps to monitor its poultry suppliers in China to ensure food safety in its KFC outlets. Soon after investigations conducted by a third-party agency from 2010 to 2011 found eight batches of chicken, supplied to Yum! by Liuhe Group, with antibiotics levels that didn’t meet prescribed standards, Yum! stopped buying from Liuhe.
The company is keeping a close watch on its suppliers, and is conducting vigorous testing procedures to check their suppliers’ quality standards. The company is cutting ties with suppliers that source their chicken from small farms that are hard to regulate. Yum! has recently announced that it is eliminating 1,000 slaughterhouses from its network, from where 25 of their poultry suppliers source their chicken.
The same strategy was applied by its competitor McDonald's (NYSE: MCD), which faced a similar situation few months ago. When the burger chain suffered from allegations of containing antibiotics in their meat, it suppressed the negative publicity by telling consumers that it is detaching ties with the supplier in question. Luckily, McDonald's was not much impacted with the news like Yum!, and thus, their same-store sales in China dropped just 0.9% in the fourth quarter, and their total profit rose 1.4%.
It’s good that Yum! has realized that the dominant reason behind their declining quality of chicken lies in China’s meat industry. The entire Chinese meat industry relies on small scale farms, and thus is vulnerable to risk as the small scale farms hardly meet the quality standards. Thus, Yum! is planning to tie up with international poultry suppliers. The company has announced that it’s working with international poultry suppliers, and is helping them enter the Chinese market, or to invest in the Chinese small scale suppliers to improve their quality.
Not only Yum! has realized the weakness in the Chinese meat industry, but it has also taken initiatives to bring it to the notice of the government that the industry requires more investment and quality check. The company has invited representatives from industry groups, such as the China Chain Store & Franchise Association, the China Cuisine Association, and the China Animal Agriculture Association to speak at the company’s press emphasizing the fact that the meat sector requires more investment and better management, to ensure quality and consumer safety.
Competition is constantly increasing in the lucrative Chinese market. On one hand, its biggest competitor McDonald's, has plans to add almost 750 restaurants to their 1300 outlets in China, while on the other hand, Burger King (NYSE: BKW), which currently operates only 100 outlets in China has plans to open almost 1000 new outlets in the mainland within the next five to seven years. Yum! already operates more than 4,200 KFC restaurants and 800 Pizza Huts in China.
When all of its competitors are expanding, Yum! is not sitting idle. Though sales at its KFC stores open at least 12 months in China declined 41% in January, that won’t stop Yum from trying. The company plans to open at least 700 stores in China. Once the company manages to solve the quality issue problem, these large number of stores will surely help it to boost its topline.
Foolish bottom line:
Regaining the confidence of its consumers won’t be an easy task for Yum!, but the company has taken the first step to do so. The company is already showing decent performance in other parts of the world. Once the company becomes successful in regaining customer confidence in China, there will not be any looking back. I agree it will take time, may be not before the next two quarters, but I somehow have faith in this company. It will fight back.
sattybose has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. 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!