By Annie Gasparro
The chief executive of Yum Brands Inc. (YUM), the parent company
of Taco Bell, KFC and Pizza Hut, said Thursday it remains "very
confident" in its China business, despite economic growth slowing
in the country.
"We have never whined about the macros," Chief Executive David
Novak said at Yum's annual investor meeting in New York. The truth
is that the company's fast-growing KFC and Pizza Hut Casual Dining
chains simply couldn't stand up to last year's extremely high
growth, he said.
In the fourth quarter of 2011, Yum's sales at established
restaurants rose 21% in China, but it expects sales to drop 4% in
the fourth quarter this year. Yum's shares fell nearly 10% last
week when it announced that lower-than-expected guidance, and
investors questioned whether Yum's brands are losing traction among
Chinese consumers.
Yum's executives remained upbeat on Thursday, saying same-store
sales in China will return to mid-single-digit growth next year,
with more of that coming in the second half of the year as prior
results become easier to lap.
The Louisville, Ky.-based company has been one of the most
successful foreign brands in China, with roughly 5,000 restaurants
in the country.
While that's far fewer than the 18,000-plus locations it has in
the U.S., China contributes more to Yum's overall business than any
other foreign country, at times making up nearly half of its
quarterly operating profit.
Going forward, as the country matures, China will naturally
become less of a force on Yum's balance sheet. "China is getting to
be a lot bigger, and with a bigger base you're going to grow a
little more slowly," Chief Financial Officer Pat Grismer said.
Still, he added, "I don't know of many other scaled businesses that
have doubled in size in three years."
However, some investors challenged Yum's confidence, pointing to
Starbucks Corp. (SBUX), another major American brand in China,
which said Wednesday at its investor day that same-store sales
growth in the China and Asia-Pacific region hasn't slowed over the
past two months.
Yum raised its menu prices in China this year, which could have
caused cost-conscious consumers to fall away from the brands. But
Yum says the move didn't impact customer traffic, and that KFC and
Pizza Hut both still have strong value perceptions in the
country.
The murkier outlook in China has caused some analysts to lower
their expectations for Yum's stock recently, saying it may be a
risky bet in the near future. Over the past year, shares of Yum
have risen about 15%.
Yum maintains that it doesn't need to drastically change its
strategy in China. In sticking with the plan, Yum will speed up
new-store development, allowing the division to rely less on sales
at existing stores. Also, the addition of hundreds of new
restaurants will increase its marketing fund, allowing it to
promote the brands more widely throughout the country, Mr. Novak
said. And, going into smaller cities, where rent and labor costs
are lower, will help new stores generate a higher return on their
investment.
On average this year, Yum will have opened two restaurants each
day in China. In addition to KFC and Pizza Hut Casual Dining, the
company is also expanding its Pizza Hut Home Delivery and recently
acquired Little Sheep hot-pot restaurants there.
Yum said it expects the weakness in China this year to be offset
by stronger-than-expected operating performance in other overseas
markets and in its U.S. division. The company says newer emerging
markets, such as India and Africa, will become bigger growth
drivers for the company as China matures. For instance, Yum says
that in India, KFC is the fastest growing fast-food brand,
expanding at twice the rate of its biggest competitor.
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