Yum! Brands (NYSE:YUM) may say it's considering international consumers as it tests out a new concept in Texas called Super Chix, but after losing the crown of top chicken joint to privately held Chick-fil-A, it may be its own KFC customers who ultimately fly the coop.
The restaurant chain has been under assault globally, but nowhere more so than in China, where KFC was plagued with health and safety issues in late 2012 along with an outbreak of avian flu. KFC's China sales tumbled 15% in 2013 and were down 4% in the fourth quarter, though by the end of the year new promotions aimed at restoring consumer trust in the restaurant saw some success. A half-priced bucket of chicken, for example, drove comps 16% higher for the first 10 days of November, even if they fell again when the sale ended.
Yum! was winged at home as well, as sales at KFC fell 2% in the U.S. last year and Chick-fil-A surpassed KFC in sales even though the latter is more than twice as large as its rival. According to the market researchers at Technomic, while chicken chain sales rose 5.1% last year, Chick-fil-A sales surged over 9% year over year to more than $5 billion.
This makes the decline at KFC all the more notable and worrisome for the restaurant operator, and indicates there may be more behind the new Super Chix restaurant than Yum! is letting on.
The new restaurant opened Wednesday in Arlington, Texas, and was touted as offering "The Last True Chicken Sandwich," a marinated, hand-breaded piece of chicken fried in refined peanut oil and served on a bun.
The rest of the menu is pretty stripped-down as well, offering chicken tenders, hand-cut fries, and custard for dessert. There's also a nod to the hot fast-casual dining concept with the inclusion of an assortment of fresh toppings including lettuce, tomatoes, pickles, jalapeno peppers, and onions. But it's also a nod to Yum!'s own "KFC Eleven" concept it tested last year that offered healthier fare such as rice bowls, salads, and grilled chicken instead of fried chicken in a bucket.
Yum! needs something to pull customers back. Sales at company-owned stores are down by a 27% compounded rate over the last five years and have remained relatively flat at franchised KFC stores. In contrast, they've been steadily rising at Chick-fil-A. While KFC registered $4.2 billion in sales at over 4,400 stores in 2013, its rival saw $5.05 billion at just under 1,800 restaurants.
By rolling out a new chicken concept in hopes of stealing sales from other restaurants, Yum! might also cannibalize sales at KFC -- it has about a dozen stores in the Arlington area. Any further test expansion of the Super Chix restaurant, either here at home or abroad -- there's no reason an international consumer would be more interested in the concept than a U.S. customer would -- the toll will fall heaviest on the KFC chains.
Yum! Brands' stock is up 16% over the past year, and considering the struggles its chicken chain has had (not to mention Pizza Hut, even if Taco Bell remains a bright spot), the fact that it trades at 23 times trailing earnings and 18 times estimates suggests the chickens are about to come home to roost for investors.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.