February 6, 2013 / 3:40 PM / 5 years ago

TEXT - Fitch says China food safety concerns could taint profits

Feb 6 - Fitch Ratings anticipates weak same-store sales 
(SSS) performance in China for YUM! Brands (YUM) and McDonald's Corp.
 (McDonald's) in early 2013 due to lingering effects from the
antibiotic-related food scare for chicken at the end of 2012. We also believe
growing pressure around food safety in China will add to the cost of operating
in the country but expect both YUM and McDonald's to manage their supply chains

Due to YUM's extensive presence in China, with 5,275 units versus about 1,720 
for McDonald's, and the prominence of chicken on KFC China's menu, the impact of
negative publicity surrounding China's poultry supply has been greater for YUM 
than McDonald's. We rate McDonald's 'A/Stable' and YUM 'BBB/Stable' and continue
to view expansion into faster growing emerging markets positively, given the 
maturity of the U.S. market. 

We expect modest monetary and public-investment stimulus to support China's GDP 
growth of about 8% in 2013. Negative rating actions for YUM or McDonald's solely
in response to near-term challenges in China are not anticipated as both firms 
generate significant cash flow and are funding expansion with 
internally-generated funds.

Late Monday, YUM confirmed its anticipated 6% decline in China SSS during the 
fourth quarter and guided for a 25% decline in China SSS for January and 
February combined. Based on the firm's internal intelligence, YUM expects SSS to
gradually improve through the year and turn positive during the fourth quarter. 
The firm projects a mid-single digit decline in China SSS for the full 2013 year
to result in a corresponding mid-single digit decline in earnings. 

McDonald's also indicated that heightened consumer sensitivity related to the 
antibiotic issue negatively affected SSS in January. While not publicly 
disclosed, we believe the impact to McDonald's was not as great as that of YUM 
during January. McDonald's SSS in China declined just 0.9% during the fourth 
quarter of 2012.

YUM expects restaurant margins in China to decline to the mid-teens range in 
2013, down from 18.1% for 2012. The decline is being attributed to traffic 
trends and not an increase in food, labor, or other restaurant expenses. YUM 
continues to expect mid-teen labor and 3% commodity inflation in China during 
2013 but is launching a comprehensive quality assurance program with its chicken
suppliers following the Chinese New Year in February.

For additional information see:

"Fitch: YUM's Ratings Not Immediately Impacted by China Weakness," Feb. 5, 2013.

"Scenario: China Rebalanced - What a Rebalanced China Would Mean for 
Corporates,"  Jan. 24, 2013.

"2013 Outlook: U.S. Restaurants - Intensifying Competition, Food Inflation and 
Legislation to Drive Operating and Financial Strategies," Dec. 19, 2012.
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