Chicken continues to be a hard sell for KFC restaurants in China. The good news is that the restaurant's poultry supply, managed by its owner Yum! Brands (YUM +0.60%), has been cleared by the Chinese government as being safe to eat.
KFC restaurants in China are still plagued with low sales, as consumers are still in doubt over the safety of their food. To convince consumers that its food is safe, Yum! has taken to social media outlets to promote the safety of its food. The company has also rolled out a mobile app to bring customers back by offering coupons and the option to pay for orders through a mobile device.
The Wall Street Journal reported that the Shanghai Food and Drug Administration finished its review of Yum!'s chicken supply in January, without bringing forth a case against the company. Fines were also not assessed for any wrongdoing. As the company worked to comply with the agency's recommendations, Chinese consumers continued to voice concerns through social media about the safety of the food.
To make matters worse, younger Chinese consumers also regard KFC as a little behind the times, especially when compared to rivals such as McDonald's (MCD 1.30%) and Burger King Worldwide (BKW +0.00%). As a result, the company is considering remodeling its restaurants and modifying its marketing message to attract younger consumers .
Yum! expects sales to bounce back in 2014
Yum! Brands had a disappointing third quarter of 2013 with earnings per share declining 15%. Its China division reported a decline of 11% in Sept. same-store sales, which reflected continued soft sales due to the bad publicity surrounding the company's poultry supply. In November, KFC offered promotions in the first half of the month that helped to increase same-store sales in China by 16%. However, after the promotions ended same-store sales dropped by 8% for the remainder of the month .
Yum! expects further same-store sales declines out of China in the fourth quarter. The results are expected to negatively impact full-year EPS in the "high-single to low-double-digits" compared to last year. A higher-than-expected tax rate also affected the sales recovery.
Yum!'s other restaurants in China, Pizza Hut and Taco Bell, have delivered strong results and their performance has been as expected. Taco Bell alone has delivered seven straight quarters of positive same-store sales growth. Yum! is confident that its KFC business will eventually turn around, as the company continues to push forward in China with expectations to open 700 new units by the end of this year. Yum! predicts 20% EPS growth in 2014 and expects that double-digit EPS growth will be restored in the near future .
McDonald's business in Asia shows some weakness
While KFC restaurants struggle to attract customers, McDonald's Asia/Pacific, Middle East and Africa, or APMEA, comp sales for the third quarter ended Sept. 30 were down 1.4%, as ongoing economic challenges continue. The company is focused on several key priorities in the APMEA segment -- bringing growth to breakfast and late-night food items, improving local market relevance, and expanding the affordability and convenience of its restaurants .
The APMEA segment appears to be dragging down results for the company. For the month of October 2013, comp sales dropped 2.8%, while growth was noted in the U.S. and Europe when compared to last year. For YTD October comp sales, the APMEA segment reported a decrease of 1.8%; Europe saw a drop of .20% and the U.S. segment grew by the same amount. The decline in sales in the APMEA segment was mostly due to negative results coming out of Japan, rather than China .
For Burger King, the Asia Pacific market reports consecutive-quarter growth
Unlike its competitors, Burger King had comp-store sales growth of 3.7% in its Asia Pacific, or APAC, segment. This marks the fourth straight quarter of positive sales growth in this segment. The company attributes the growth in part to new restaurant openings in the region, with a total of about 174 since last year. China was considered to be a main driver of restaurant growth. A new menu and other changes to operations have also helped to drive customer traffic and improved the dining experience.
Burger King's organic growth in adjusted EBITDA was greatest in the APAC segment, which had a 15.2% increase during the third quarter ended Sept. 30 when compared to the same period in 2012. Unlike KFC, Burger King and McDonald's have been able to manage the food scares in China fairly well. These scares tend to surface on a regular basis. In fact, just the other week the South China Morning Post reported new cases of avian flu .
My Foolish conclusion
As KFC restaurants work on putting the issue of excessive antibiotic use in their poultry behind them, Yum! will probably continue to deal with ongoing issues in China with the avian flu, an issue that impacts both human health and the food supply. So far, Yum! Brands' expectations of a quick recovery for its KFC restaurants have been overly optimistic, and it remains to be seen if growth will return in 2014. If business at KFC continues to lag, it will be interesting to see if Yum! Brands changes its focus toward growing its Taco Bell and Pizza Hut segments instead.
