KFC in China used to be an unstoppable juggernaut. Now it’s retreating over food safety.
Yum! Brands, the parent company of KFC, Taco Bell, and Pizza Hut, reported third quarter earnings on Tuesday afternoon and missed consensus analyst estimates. Yum! posted earnings per share of $0.87, narrowly lower than the $0.88 consensus, and revenue of $3.35 billion, also below the $3.45 billion estimate.
The main problem was in China, where overall system sales fell 9%, and same store sales sank 14% in the wake of a July food safety scandal. Workers at KFC and McDonald's MCD +0.38% meat supplier Shanghai Husi Food Co were shown in a TV report reusing meat that had fallen to the factory floor, as well as mixing fresh and expired meat.
As Chinese regulators shut the doors at Husi, both American chains apologized and quickly announced that they had switched meat suppliers. But the episode has driven Chinese consumers away from KFC restaurants, just as another scandal did in 2012. Yum! is especially reliant on KFC’s huge presence there, as China accounts for more than half of the company’s worldwide sales.
Yum! said the scandal “significantly impacted China sales” and led to the company to reduce its full year earnings per share growth projection from 20% to just 6-10%.
“China sales are on the path to recovery and we expect to develop at least 700 new restaurants in China this year, which we’re confident will ultimately deliver