By Lisa Baertlein
Feb 5 KFC parent Yum Brands Inc on Tuesday said time, not ad spending, is the cure for a steep sales decline at its restaurants in China that was sparked by a food safety scare late last year.
The fast-food operator makes more than half of its overall sales in China, and customers there began shunning Yum's restaurants in December after news reports and government investigations focused on chemical residue found in a small portion of its chicken supply.
The company was not fined by food safety authorities.
Yum has built a dominant position in China on the back of its industry-leading food quality and the current crisis underscores how vulnerable even the strongest restaurant chains are to quick shifts in consumer perception.
The company has nearly 5,300 restaurants in China, mostly KFCs, and quickly responded to the crisis with free beverage and ice cream promotions - which went nowhere, Chief Executive David Novak said on a conference call with analysts.
"There's not a whole lot we can do right now that's going to turn the tide. We need some time," Novak said, adding that Yum has no plans to increase its already significant advertising spending in China.
"We could be wasting a lot of money doing marketing right now," he said.
However, Yum is refining and strengthening its food safety standards. It also plans to begin an aggressive marketing campaign after the Feb. 10 Chinese New Year to underscore its commitment to food safety and restore KFC's brand image.
On Monday, Yum reported a 6 percent drop in fourth-quarter 2012 sales at established restaurants in China and forecast a surprisingly steep 25 percent drop for the first quarter.
Yum's first quarter in China includes just January and February, while the fourth quarter includes the last four months of the year.
Based on the company's experience with prior sales-damaging crises related to Severe Acute Respiratory Syndrome (SARS), avian flu and "Sudan Red" dye, Yum said it does not expect restaurant sales there to turn higher until the fourth quarter of this year.
In 2005, Yum pulled some products from its KFC restaurants in China because they contained "Sudan Red" dye, which was banned from use in food due to concerns it could lead to an increased risk of cancer.
At the nadir of that crisis, Yum's China same-store sales plummeted 40 percent, executives said.
The chicken scare appears to be equally damaging. Last month, China same-store sales fell 41 percent at KFC and 15 percent at Pizza Hut Casual Dining.
This time around, comments on Weibo - China's equivalent to the popular U.S. social media site Twitter - appeared to play a big role in the sales decline.
"One thing we've learned is how quickly word travels in China," Morningstar analyst R.J. Hottovy said. "This is the first time we've really seen social media have a profound impact on results."
Yum said it would keep Wall Street abreast of its progress by reporting monthly sales at its established restaurants in China until business there recovers, Chief Financial Officer Patrick Grismer said on the call.
"They're taking this issue very seriously," said Hottovy, who cited the additional financial disclosures and the company's sharpened focus on its food quality.
Other analysts were less convinced.
While the enhanced disclosure is appreciated, Yum outlined no clear "fix" for China restaurant sales and is instead relying on a "time heals all wounds" mantra, Oppenheimer Equity Research analyst Brian Bittner said in a client note.
"This is a 'prove it' story," he said.
Yum's shares ended regular trading on Tuesday at $62.08, down $1.86, or 2.9 percent.