What is in this article?:
- Analysts weigh China survival strategies for Yum, McDonald's
- Focusing on margins
Industry watchers say the restaurant brands can’t count on the country’s slow economic growth to meaningfully improve same-store sales.
Ahead of meetings with management in Shanghai this week, securities analysts noted that the two biggest Western brands in China, Yum! Brands Inc. and McDonald’s Corp., cannot simply count on China’s slowly accelerating economic growth and the dissipation of food supply concerns to improve their same-store sales meaningfully in the country.
Louisville, Ky.-based Yum hosted investors Sept. 9–10 in Shanghai to discuss its nearly 6,000-unit system in China, while Oak Brook, Ill.-based McDonald’s was scheduled to lead meetings there Sept. 11.
In the case of both brands, same-store sales in the country have faltered since late last year, when televised reports of widespread antibiotic use in chickens raised there prompted food safety concerns. China’s economic growth also has slowed from its post-recession highs of 2010, pressuring consumer spending there and weighing on restaurant sales.
One securities analyst for Deutsche Bank noted in a preview of this week’s investor meetings that, while those challenges are getting better for Western brands operating in China, Yum and McDonald’s would not necessarily benefit from better macroeconomic trends there if they did not focus on unit-level profitability and devise a strategy for growing beyond China’s largest markets.
“Overall, we are not looking at the improving economy as the driving force for Yum’s and McDonald’s operations, but rather as a barometer for the direction of the China economic landscape,” analyst Jason West wrote in a “Shanghai Survival Guide” research note recently. “Should the positive trend for GDP growth continue, it is possible that company-specific same-store sales might follow suit. We would need to see evidence of the improved macroeconomic factors, coupled with strong and consistent recovery of Yum’s and McDonald’s same-store sales, materialize before we get excited about near-term prospects in China.”
Bigger than bird problems
Earlier this week, Yum reported that same-store sales in China decreased 10 percent in August and 11 percent in the third quarter, citing lingering effects of bad publicity generated by the December 2012 state television report questioning the safety of poultry raised in China. New fears of avian flu also emerged this past March and April in China, further damaging sales at KFC.
While West did not discount Yum’s anomalous difficulties in China this year, he noted that same-store sales in the country had been decelerating even before these crises began. Yum’s comparable sales in China had slowed from a 21-percent gain in the fourth quarter of 2011 to a 6-percent increase in the third quarter of 2012, the period before the chicken supply controversy.
Additionally, West wrote, McDonald’s same-store sales in China were increasingly negative the past three quarters even though the brand’s more diverse menu insulated it somewhat from the poultry issues that caused KFC’s sales to crater in China.
“We believe this suggests the broader macro slowdown in that market is impacting consumer spending at restaurants, similar to what was seen in late 2008 and early 2009,” West wrote. “During that cycle, Yum’s and McDonald’s same-store sales were sluggish for about five quarters before rebounding strongly in 2010 on the back of massive government stimulus and a global economic recovery.”
However, he added, while China’s economy is showing early signs of stabilizing, Deutsche Bank’s economists are forecasting a softer recovery after this downturn. They project gross domestic product growth in 2014 and the second half of 2013 to range from 7.8 percent to 8.5 percent, compared with China’s 10-percent rebound in GDP in 2010.