Yum! Brands Learns About China the Hard Way

KFC Restaurant
KFC Restaurant

Yum! Brands Inc. (NYSE: YUM) filed an 8-K with the SEC that drove down its share price. Problems with the Chinese government have hurt its sales:

Due to adverse publicity associated with a government review of China poultry supply - and the corresponding significant impact on KFC China sales during the last two weeks of December - we now expect China Division same-store sales to be -6% for the fourth quarter of 2012, versus our previous forecast of -4%. The Company expects full-year 2012 earnings per share, excluding Special Items, of approximately $3.24. We do not anticipate providing any further updates or commentary until our scheduled earnings release on February 4, 2013.

Yum!'s other reaction to the trouble came in the form of an odd statement that seemed to blame both itself and the Shanghai FDA:

Our food is perfectly safe to eat, and KFC in China has very strict food handling and quality control standards that meet or exceed all government regulations. We require all suppliers to follow those standards to ensure food safety. We regularly audit our suppliers, and if we ever find a supplier in non-compliance, we take immediate corrective action to resolve the issue, including terminating the relationship if that is warranted. We will continue to cooperate with the Shanghai FDA as they conclude their review and hope to use their findings to strengthen our industry-leading standards and processes to prevent isolated supplier issues from repeating in the future.

There is nothing wrong with KFC chicken, but Yum! Brands can learn to improve its standards by examining the opinions of the government. Either the chicken is safe or its is not.

As with other U.S.-based fast-food chains, China has become the Holy Grail of growth. The American market is saturated with a McDonald's Corp. (NYSE: MCD), Starbucks Corp. (NASDAQ: SBUX), KFC, Burger King Worldwide Inc. (NYSE: BKW) or Wendy's Co. (NASDAQ: WEN) location on every corner. China has hundreds of millions of new customers, so these corporations have rushed to add thousand of locations in the People's Republic.

Yum! Brands got what it wanted. KFC become one of the dominant fast-food businesses in China. Sales there were supposed to spring it into the same league, worldwide, as McDonald's or Subway, the latter of which has more outlets around the globe than any of its peers. But, in China, what is at most a minor food supply problem, if it is any problem at all, has ruined a quarter, or more, of Yum! Brands results.

Welcome to the People's Republic, where regulators do as they please, and there is no means for an appeal of what could be an issue that is less than benign.

Filed under: 24/7 Wall St. Wire, Earnings Warning, Food Tagged: BKW, featured, MCD, SBUX, WEN, YUM