Yum! Brands Not the Only Fast Food Giant Facing Pain from China

One byproduct of a slowing Chinese economy appears to be that its huge population is cutting back on its consumption of fast food and casual dining fare.

At least that was the sense gleaned from one of the largest operators in the country Yum! Brands earlier in the week. The fast food giant, which has a combined 6,867 KFC and Pizza Hut locations open in China, reported dreadful third quarter results in China and served up dour commentary on consumer demand that rocked the industry.

“In recent weeks, we’ve seen companies cut back on parties, dinners and entertaining — so, while our weekend business is doing okay, this has impacted our weekday dinner results significantly,” explained Yum! Brands CEO Greg Creed on the company’s third quarter earnings call Wednesday. Same-store sales at KFC China increased a paltry 3%, while those for Pizza Hut’s China division fell 1%.

At KFC’s China division, Creed acknowledged that the recovery from a high-profile food supplier issue in 2014 is occurring more slowly than expected, in large part due to surprising economic weakness. The situation at Pizza Hut was even more alarming.

According to Creed, in late August and continuing into September, the company witnessed a “very substantial deceleration in same-store sales” in China versus what had been forecast. Creed and other execs blamed volatile financial markets and the yuan deflation for the slowdown, both of which occurred as the company was introducing an important premium-priced steak product.

Yum! Brands’ bombshell on China, which led to an 18% plunge in its stock on Wednesday, comes as many companies are banking on continued strong growth in China’s fast food industry. In a new report released this month, research firm IBISWorld estimated that the country’s fast food sector will generate $121.7 billion in sales in 2015, up 9.7% from 2014. Over the five years through 2015, IBISWorld estimated the industry’s revenue has been growing at an annualized rate of 11.6%.

And that favorable outlook has been echoed elsewhere. “Constantly revamped menus featuring localized dishes, together with the family-concept dining environment, is expected to underpin the stable growth,” said Euromonitor International back in July.

TheStreet takes a look at four other fast food players with significant operations in China that may be poised to disappoint investors with their results in the months ahead. The list is ranked from largest operators in the country to the smallest ones.

1. McDonald’s 

Number of locations in China (estimated): 2,000

China as a percentage of global store count: 5.7%

Despite efforts to improve its value perception and the introduction of delivery services, McDonald’s has not performed well in China this year. Comparable sales in China for the second quarter fell 3% — the top five cities, which represent about 50% of China’s sales for the company, delivered flat comparable sales for the quarter.

“Lower tier cities are not recovering as quickly as top tier cities, driven primarily by weaker macroeconomic conditions in those outlying areas,” said McDonald’s CEO Steve Easterbrook on the company’s second quarter earnings call in July, adding “we are on track to return to a normalized level of performance in China for the second half of the year.”

But “normalized” performance in China may be something not in the cards for McDonald’s until 2016, based on the dreary commentary shared by Yum! Brands.

2. Burger King

Number of locations in China (estimated): 350

China as a percentage of global store count: 2.7%

China has been a key driver of Burger King’s Asia Pacific segment, which delivered a 2.3% same-restaurant sales increase in the second quarter. In fact, strength in China helped to offset sluggish results in Australia, a component of the company’s Asia Pacific segment. Burger King is a division of Restaurant Brands International.

“In particular, we saw sales growth and unit profitability growth accelerate in China,” boasted Burger King CEO Daniel Schwartz on the chain’s second quarter earnings call in July.

Similar to Yum! Brands, however, slowing demand for fast food in China seemingly out of nowhere could surprise Restaurant Brands’ investors.

3. Papa John’s

Number of locations in China (est.): 232

China as a percentage of global store count: 5%

Papa John’s has struggled to turn a profit in China since it opened its first restaurant there in Shenzen in 2005. The ongoing difficulties, in part due to the high cost of owning about half of its restaurants in the country, led to the closure of 11 locations in 2014.

So far in 2015, the situation hasn’t improved much. “Our China business showed a modest improvement versus the prior year, I think we’re making some progress — it’s still early,” said Papa John’s CFO Lance Tucker on the company’s first quarter earnings call. No additional details on China’s performance were shared on the second quarter call.

Any turnaround for Papa John’s in the country may be pushed out to 2016 in light of the issues highlighted by Yum! Brands.

4. Domino’s Pizza

Number of locations in China (estimated): 60

China as a percentage of global store count: 0.5%

The Chinese becoming more comfortable eating cheese, as well as a growing dairy herd, are two factors why China has been seen as a ripe expansion opportunity for Domino’s. “We are starting to have success there, but it has taken some time,” said Domino’s Pizza CEO Patrick Doyle in an interview with TheStreet in April.

With the Chinese economy slowing, though, opening new restaurants may be put on the back burner. At the 60 restaurants already open in China, generating healthy sales and profits may take longer than execs and investors anticipate.

Source: TheStreet