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ANALYSIS - Slowdown hits Yum in China, rebound seen

HONG KONG (Reuters) - Fast-food giant Yum Brands’ higher-end Pizza Hut chain became an Achilles heel in China during the global slowdown, but a recovering economy and geographic diversification drive should ease its pain in the months ahead.

A KFC worker attends to a customer at a KFC outlet in Beijing in this April 2007 file photo. REUTERS/Claro Cortes IV

Yum, parent of Pizza Hut, KFC Ltd and Taco Bell, surprised investors on Tuesday when it cut its full-year sales forecast on weakness in its two biggest markets, the U.S. and China.

The company had warned that the second quarter would likely be its most challenging and a low point for the year. It said that same-store sales in China, which accounted for more than half of its operating profit, were expected to be flat this year versus a previous forecast for 5 percent growth.

The company may have fared worse in China than rivals including McDonald’s Corp and Burger King Holdings because of its Pizza Hut chain, a pricier option traditionally costing two to three times more than typical fast food and local Chinese restaurants.

Yum has 2,670 KFC’s and 516 Pizza Huts in China.

During the economic uncertainty at the height of the global financial crisis earlier this year, many consumers roped in their spending at pricier stores in favour of cheaper options, amid uncertainty about employment and salaries.

China’s affluent coastal areas and biggest cities, where many of Yum’s stores are concentrated, may have also taken a hit during the downturn, analysts said.

“Confidence has gone up in the last month or so,” said Shaun Rein, managing director of the China Market Research Group. “April in many ways was the worst time for anything that’s consumer-oriented,” he said.

After years of strong growth, including 14 percent same-store sales growth in China in last year’s second quarter, some could see Yum’s latest figures as a worrying sign for those who were looking to China to power it and its peers into the future.

But some analysts said the second quarter may be more an aberration than an actual shift in trends, as Chinese consumers recover their confidence and spend more, amid a massive government economic stimulus programme.

Diversification from their current concentration in export-oriented coastal areas and first-tier cities that have been hard hit during the downturn could also help the chains to recover in the remainder of the year.


Additional reporting by Nerilyn Tenorio