US fast food companies’ results boosted by China sales

Updated: 2014-02-11 09:06

By MICHAEL BARRIS in New York (China Daily USA)

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To say China is important to both Yum! Brands and McDonalds Corp is an understatement. "Vital" would be a better word.

The US fast-food industry is crowded with competitors, all of whom vie for market share on the basis of price, convenience, service, menu variety and product quality. Besides Yum and McDonalds, the field includes Starbucks Coffee Co and Chipotle Mexican Grill Inc. In addition, the US' recovery from the recession has been slow, crimping the public's restaurant spending.

Flatter US sales in the sector have become the norm. For McDonalds and Yum, China — the world's most populous country with a fast growing middle class — represents a large market not yet saturated with fast food in a moribund global economy.

So signs last week that these companies might be turning a corner in China, where concerns over avian flu and tainted chicken supplies last year drove away customers, caused some observers to regard their latest quarters positively.

For Yum, the parent of KFC, Pizza Hut and Taco Bell, sales at stores open at least a year, also known as same-store sales, fell 4 percent in China. But operating profit in the country rose 5 percent as profit margins climbed 0.4 percentage point to 14.3 percent. Management reaffirmed its 2014 outlook for earnings per share growth of at least 20 percent.

On Monday, shares of Yum, which has more than 4,400 KFC and 1,000 Pizza Hut stores in China, closed at $72.76, up $1.03, or 1.4 percent on the New York Stock Exchange.

For McDonalds' part, the world's largest restaurant chain by revenue said gains in China helped offset a weak performance in the US, where customers remained cautious in their spending.

McDonalds, which plans to add 300 stores in China this year to bring its total in the country to more than 2,000, said worldwide sales at restaurants open at least 13 months rose 1.2 percent last month – beating the estimate of analysts surveyed by Consensus Metrix for a rise of 0.7 percent. US same-store sales dropped 3.3 percent, deeper than analysts' projected 1.6 percent decrease.

The company known for the Big Mac hamburger blamed the frigid cold and snow that hit large parts of the US, but analysts said McDonald's US patrons continue to pull back spending amid the slow economic recovery. "It's the same story: the mid-to-low income consumer continues to be frugal," Edward Jones analyst Jack Russo was quoted by Reuters.

Helped by growth in China, sales rose 5.4 percent in the Asia Pacific, the Middle East and Africa region, better than analysts' prediction of a2 percent increase. McDonald's had warned in January that sales for the month would be weak, citing stiff competition and a sputtering global economy.

McDonald's NYSE-traded shares closed Tuesday at $94.86, up $1.06, or 1.1 percent.

Analysts are divided over whether the results foretell a broader turnaround in the market, particularly in China, where economic growth has been slowing. Motley Fool consumer goods analyst Mike Finarelli said in a video posted on the financial news website that he still believes that Yum's China struggles will prove to be short term, saying the markets in China and India have plenty of growth potential.

On the other hand, Finarelli's Motley Fool colleague Mark Reeth said he sees Yum at the mercy of many menu-related factors that are out of its control.

Yum Chief Public Affairs Officer Jonathan Blum said the company was "not seeing any impact nationally" on its China sales from new reports of avian flu. After food safety concerns and an avian flu outbreak early last year sent same-store sales plummeting, Yum launched a marketing offensive to jump-start sales growth.

Yum's earnings release came days after Shanghai began a three-month ban on live poultry sales and as Hong Kong launched a three-week ban on Chinese poultry and killed 20,000 birds after Chinese mainland imports tested positive for bird flu.

In an article for 24/7 Wall Street, analyst Paul Ausick wrote that "McDonald's may have a good strategy for growing its Chinese business, but the company waited too long and let Yum! build too large a lead. Competition from other companies like Starbucks Corp. and Dunkin' Brands Group Inc. that are also putting significant focus on China makes McDonald's path to glory even trickier."

The world fast-food industry is expected to generate almost $240 billion in 2014, representing a 19 percent increase over five years.

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