Why Is China Proving More Difficult for Yum! Brands?
Yum! Brands: The Negative Impact of Its China Division
Why is China more difficult?
We believe it may take about five quarters for Yum! Brands’ (YUM) China division to return to positive territory. The fifth quarter for the company was 3Q15, and indeed, the company’s same-store sales growth returned to positive territory. However, it was lower than what investors expected. So why is recovery in China more difficult this time around?
Issues in China
Yum! revenue has closely trended with China’s division. However, since the company split off its China division, its total revenue will not be dependent on what happens in China. The company shared some issues that have impacted its China growth, and they may explain why recovery in China has been difficult.
Intensifying competition
Competition in China has increased and taken on a new form, which, for the most part, has been fueled by new technology. When considering factors that played a role in Yum! Brands’ 3Q15 performance in China, consider this:
More and more consumers are using online platforms to order from local restaurants.
Online platforms put local stores with limited exposure to technology on a level playing field with big competitors such as Yum!
Online platforms, or aggregators, tend to offer deep discounts to customers, giving them better reasons to keep using those platforms and develop online ordering habits.
Big picture issues
The weakness in the Chinese economy was also a dark cloud over Yum! in 3Q15. Here are a few pieces of the larger picture:
Pizza Hut’s weekday dinner was impacted because, according to Yum! management, companies in China “cut back on parties, dinners and entertaining.”
China’s stock market crashed during 3Q15, a negative for consumer sentiment. However, consumer sentiment bounced back to 105.6 in September from the low of 104 in August.
China devalued its currency in 3Q15, hurting Yum! Brands’ full-year EPS (earnings per share) growth rate by as much as 1% to 2%.
These factors should also impact Starbucks (SBUX) and McDonald’s (MCD) in China. Currently, Yum! Brands and Darden Restaurants (DRI) make up ~1.8% of the Consumer Discretionary Select Sector SPDR ETF (XLY).
We’ll wrap up this series in the next part with Yum! Brands’ valuation multiple.
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