Yum! Brands (YUM) reports after the close tonight and all eyes will be on China after a supplier scandal emerged in the middle of July. This is the second consecutive year in which Yum! Brands has been hit by negative headlines driven by supply chain issues (think mixing expired chicken with fresh chicken). While this time around the supplier in focus represented a small portion of KFC's meat supplies, the Chinese consumer is simply chickening out when it comes to fast food. As a reminder, McDonald's (MCD) most recent comps in the Asia Pacific, Middle East and Africa (APMEA) region declined by 15%.
The most recent update from Yum! Brands showed that China comps fell by 13% in the third quarter. This implies comps dropped more than 25% post-scandal. The big question is: has the consumer made its way back to KFC registers during Q3? We suspect the answer is no, and as a result KFC might have to add back promotions in order to tempt the consumer. That means beware of Chinese restaurant margins for the remainder of 2014.
The good news is expectations are on the floor when it comes to chicken in China and before the latest supply chain headlines, comps in the region were returning to robust growth, largely driven by an expanded menu. Going forward, the brand will add new items annually and refresh stores. While China is largely a wait-until-the-dust-settles story, don't forget about the U.S. (25% of sales).
Yum! Brands' big story on the U.S. side is Taco Bell. Most recently, the brand introduced breakfast, which helped drive a 2% rise in comps last quarter -- but to be honest we would have expected a bit better than that, based on the new initiative. After a few quarters of distraction, however, the company seems refocused on the entire business. The company will need all hands on deck, as the fast food space has no shortage of competition at the moment. Things like new entrants, freebies, chains adding breakfast abound.
Not enough transition for you? Add in a new CEO on deck, and that is a lot on this company's plate.
