Yum CEO says KFC China needs more time to recover

Reuters

By Lisa Baertlein

Oct 9 (Reuters) - Yum Brands Inc's chief executivesaid on Wednesday the company still must fully convince dinersin its top market of China that food at its KFC restaurants issafe, following a pair of safety scares, and predicted 2014would be a "strong bounce back year."

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

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

On Tuesday the company said Yum's China same restaurantsales fell 11 percent in the third quarter, and 11 percent inSeptember, the first month of the China divisions' fourthquarter, and that it would take longer than expected for thosesales to rebound.

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

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

Executives during a conference call with analysts onWednesday attributed the China sales decline to the "one-twopunch" of a social media-fueled chicken supply safety scare andbird flu in the country.

But analysts have said China's middle-income diners have cuttheir spending due to government austerity measures. KFC alsofaces stronger competition from local eateries, and the companymay 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 oftrust," Chief Executive David Novak said on the call. "That'swhat we're getting after."

Chinese consumers are wary about locally available foodfollowing repeated and sometimes deadly food-contaminationscandals. A recent Pew Research report said almost one-quarterof Chinese people felt that food safety was a "very bigproblem".

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

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

Executives on the call said a new beef burger that theyhoped would boost sales in September also fell far short ofexpectations.

The China division's fourth quarter began in September andends in December. Its weak start prompted Yum in its earningsreport on Tuesday to retract its forecast for a fourth-quarterrecovery in China restaurant sales.

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

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

The company declined to say when it expects China same-storesales to rebound, but Chief Financial Officer Patrick Grismersaid Yum expects those sales in the fourth quarter to improvefrom the third quarter.

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