Trust chicken from KFC in China? The Chinese don't

KFC's owner it is taking steps to win back consumers in China, after a damaging meat scandal. Photo / NZ Herald

China has proved an incredibly lucrative market for Yum Brands, the American fast-food titan whose restaurant chains include KFC, Pizza Hut and Taco Bell. Yum's China division is easily the company's most profitable, and Yum is plowing big money into deepening its presence in that nation, with plans to grow its fleet of 6,387 restaurants there to 20,000 locations by 2020.

With so much riding on its Chinese business, the company knew it would likely take a major blow when reports surfaced in Chinese media in July that one of Yum's meat suppliers in that country had improperly handled food products and sold expired meat.

"When I saw that, I said, 'Uh-oh, here's six to nine months of problems,'" Yum chief executive David Novak told investors on a conference call on Wednesday.

The company's third-quarter earnings report, released on Tuesday, is the first snapshot of just how much the incident damaged Chinese consumers' confidence in Yum restaurants - in particular, KFC, which is wildly popular in China and has more than twice as many locations in the country as its fast-food competitors.

Same-store sales in Yum's China Division plunged 14 per cent in the third quarter, a decline that comes on the heels of a 15 per cent increase in same-store sales the previous quarter.

Yum executives are bullish about their prospects for bouncing back in China, repeatedly stressing to investors that they believe they're already on the path to recovery. "We have a short-term issue and we're weathering the storm," Novak said.

The company said it is taking steps to win back consumers, including a series of advertisements stressing a focus on quality assurance. Yum is also beefing up its requirements for suppliers and working to establish a whistleblower system for its employees and suppliers to encourage them to report food safety violations. These moves follow the company's decision in the immediate aftermath of the food safety issue to severe its ties with the supplier, OSI.

Even as it takes these steps, the best salve for the injury may be one that the company can't control.

"What we need most right now is the gift of time," Novak said. Executives say they expect it will take six to nine months to recover from the incident.

"Even though OSI was a minor supplier, sales at KFC and Pizza Hut were disproportionately impacted given our category-leading positions," the company said in a statement announcing its earnings results. "While sales are rebounding, they continue to be negative."

While reassuring its Chinese customers may be Yum's most pressing problem, the company is also trying to turn around its Pizza Hut business, which is struggling in the United States and elsewhere. That division saw same-store sales decline 1 per cent this quarter after falling 3 per cent in the previous quarter.

Meanwhile, a bright spot for the company was its Taco Bell division, which had a 3 per cent increase in same-store sales as its new breakfast menu gained traction with consumers. The breakfast menu is already profitable; in fact, Novak said that on Sundays, Mondays and Tuesdays Taco Bell's breakfast business is surpassing its longstanding, late-night "fourth meal" business.

- Washington Post