* Heat wave and lack of drinks, ice cream focus eats into
* Yum's China recovery may take longer than expected -
* Worries about new bird flu strain adds to stress on sales
By Lisa Baertlein and Adam Jourdan
LOS ANGELES/SHANGHAI, Aug 12 The heat seems to
be getting to KFC parent Yum Brands Inc in China, after
the fast-food chain saw China sales slide in July, with some
market watchers saying a lack of focus on cooling drinks and ice
cream meant diners looked elsewhere as record hot weather
gripping the country.
On Monday Yum reported a much steeper-than-expected 13
percent drop in July sales at established restaurants in China
as the company strives to bounce back from the double blows of a
food safety scare and bird flu outbreak in its top market.
The Chinese sales decline was something of a setback for
Louisville, Kentucky-based Yum, which in recent months had seen
same-restaurant sales declines ease.
"Because of the heat people were looking for cold drinks and
ice cream, so McDonald's, Starbucks Corp, and
Haagen-Dazs have been grabbing more share of the late afternoon
and evening dining because they have better ice cream and
drinks," said Shanghai-based Shaun Rein, managing director of
China Market Research Group.
A review of KFC's China website on Tuesday backed this up,
with almost every advertisement for hot food. McDonald's,
meanwhile, had promotions for its ice cream McFlurry and shaved
iced drinks specifically targeting an Asian market.
Local media reported that last month was the hottest July
for 140 years, with temperatures hovering close to 40 degrees
Celsius. The heat wave has held up so far in August and is
expected to break in the middle of the month.
Shares in Yum fell $2.86, or 3.8 percent, to $71.61 in
Analysts, on average, had expected a 7.1 percent decline in
China's July same-restaurant sales, according to Consensus
Consultants and analysts said that the weak showing in July
suggested Yum's China recovery may take longer than expected.
"We worry that the miss confirms a tougher competitive
environment and more cautious consumer spending," said Jefferies
in an analyst note after the results.
Yum generates more than half of its overall operating profit
in China, where it is the biggest Western restaurant operator
with roughly 6,000 mostly KFC restaurants.
Yum executives have repeatedly said that the company has
successfully dealt with crises in China before.
In a regulatory filing on Monday, they repeated their
forecast for same-restaurant sales in the world's
fastest-growing major economy to turn around in the fourth
Yum's China sales swoon started at the end of 2012, when the
discovery of excessive levels of antibiotics in chicken from two
of Yum's suppliers prompted government food safety agencies to
investigate the company's supply chain.
Yum was not fined by food safety authorities, but it
suffered a widespread backlash in the mainstream media and on
social media sites.
The July same-restaurant sales result included a 16 percent
sales drop at established KFC restaurants, which the company on
Monday attributed to "residual effects" of negative publicity
surrounding that December poultry supply incident.
Investment Technology Group analyst Steve West said he
expects Yum's China recovery to be uneven and that some
investors and analysts got "a little ahead of the curve."
Worries about a new bird flu strain gripped China this
spring, hurting chicken sales, including at KFC. So far there
have been 44 fatalities linked to the H7N9 bird flu virus in
While the number of reported cases has fallen sharply, the
World Health Organization (WHO) has cautioned against calling
the outbreak over because the flu virus does not circulate as
easily in warm weather.
There is also concern that China's cooling growth could keep
a lid on demand for fried chicken and other fast-food.
Once boasting double-digit growth, China is now expanding at
a more modest 7.5 percent rate and there are concerns over
credit markets overheating and a bubble in the housing market.
Yum is not the only company struggling with softness in
China. McDonald's last week reported that its China
same-restaurant sales also declined in July.