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Yum CEO says KFC China needs more time to recover

Oct 14, 2013 01:21 PM EDT | By Staff Reporter
kfc, china, fast food

Yum Brands Inc's chief executive said on Wednesday the company still must fully convince diners in its top market of China that food at its KFC restaurants is safe, following a pair of safety scares, and predicted 2014 would be a "strong bounce back year."

Shares in Yum tumbled 7.8 percent to $65.75 on the New York Stock exchange on Wednesday.

Yum's sales at restaurants in China have taken a beating since chemical residues were found in chicken from some of its poultry suppliers in China late last year. That was followed by a bird flu outbreak in China this spring.

On Tuesday the company said Yum's China same restaurant sales fell 11 percent in the third quarter, and 11 percent in September, the first month of the China divisions' fourth quarter, and that it would take longer than expected for those sales to rebound.

Yum is the biggest U.S. restaurant operator in China and that market traditionally accounts for more than half of the company's operating profit.

Up until this year, Yum's stock was considered a popular way to invest in China - the world's fastest-growing major economy.

Executives during a conference call with analysts on Wednesday attributed the China sales decline to the "one-two punch" of a social media-fueled chicken supply safety scare and bird flu in the country.

But analysts have said China's middle-income diners have cut their spending due to government austerity measures. KFC also faces stronger competition from local eateries, and the company may have opened too many fried chicken restaurants in China, those analysts have said.

"I think what we really have here is a country-wide issue of trust," Chief Executive David Novak said on the call. "That's what we're getting after."

Chinese consumers are wary about locally available food following repeated and sometimes deadly food-contamination scandals. A recent Pew Research report said almost one-quarter of Chinese people felt that food safety was a "very big problem".

Yum already has taken steps to strengthen the quality of its poultry supply chain by culling weak performers.

On Wednesday, it unveiled plans for its "I Commit" food quality campaign in which KFC employees, suppliers and poultry farmers will tell diners that the chicken chain's food is safe.

Executives on the call said a new beef burger that they hoped would boost sales in September also fell far short of expectations.

The China division's fourth quarter began in September and ends in December. Its weak start prompted Yum in its earnings report on Tuesday to retract its forecast for a fourth-quarter recovery in China restaurant sales.

Executives say they are confident they can secure ample safe poultry supplies even as they plan to build at least another 700 restaurants next year in China, where KFC outlets account for roughly 4,500 of the company's more than 6,000 restaurants in China.

"We're confident a full recovery is in store, but more time and effort is required," Novak said on the call.

The company declined to say when it expects China same-store sales to rebound, but Chief Financial Officer Patrick Grismer said Yum expects those sales in the fourth quarter to improve from the third quarter.

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