Analysis: China diners say more than economy hurting Yum's KFC

Wed Dec 5, 2012 3:20pm EST
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By Lisa Baertlein

NEW YORK (Reuters) - A slowdown in China's economy is not the only strain on Kentucky Fried Chicken's business in the country, where competition is getting tougher and customers are getting pickier.

KFC parent Yum Brands Inc warned last week that it expected sales at established restaurants in China to fall 4 percent in the fourth quarter, despite an improvement in economic indicators such as consumer confidence and retail sales. Yum shares are down more than 11 percent since the warning.

Interviews with diners in Shanghai and Beijing, and a review of comments on Sina Weibo - China's equivalent to Twitter - show many diners are unhappy with KFC's half a dozen or so price increases in recent years, as well as changes in the local menu.

The new products "are horrible, not as good as before," said Queen Hu, 24, a consultant at accounting firm PwC. She used to eat frequently at KFC when she was in college, but has since cut back to about two to three times a year.

Yum will hold an investor day on Thursday where it is likely to face tough questions about its China business, which contributes more than half of its revenue and operating profit. Investors want to know whether the fourth quarter decline is a one-off, or a sign of real problems in the China market.

Many analysts expect the company to successfully navigate the slowdown, even as some forecast the rough patch could stretch into the middle of next year as Chinese consumers grapple with cooling economic growth and a once-in-a-decade leadership transition.

"It has yet to be seen what measures the country's new leadership will take to stimulate demand, but it is quite possible that the Chinese consumer will remain cautious over the near to medium term," UBS analyst David Palmer wrote in a client note.

The U.S. company was a pioneer in China and remains the largest Western restaurant operator there, with roughly 4,800 (mostly KFC) outlets in the country.   Continued...

People dine at a Kentucky Fried Chicken (KFC) outlet in Shenyang, Liaoning province June 2, 2010. REUTERS/Stringer