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Yum China fortunes rebound

Yum! China has showed progress with a system wide sales increase of 3 per cent in the latest quarter – or 7 per cent on a constant currency basis.

Same restaurant sales are now in positive growth, although by a fairly meagre 2 per cent given the 16 per cent decline in the same quarter last year. Nevertheless, the strong pace of 743 new restaurant openings, combined with some good productivity gains, helped to swell operating profit by 200 per cent.

Given the big differential in growth prospects and the fact that China faces a very different set of problems and opportunities, it is hardly surprising that Yum! is looking to split its business into two separate companies. This is a sensible step that will allow Yum! and Yum! China to focus on their respective priorities. However, without the boost to growth provided by China, the legacy business will need to work much harder to reestablish its relevance if it is to grow in a much more competitive market.

Globally, Yum! produced a set of results that exactly mirrors those of last quarter.

KFC has ended its fiscal year with a fairly solid set of numbers. That said, the growth figures are expressed on a constant currency basis and so exclude the negative impact of the strong US dollar. When this is factored in the outcome is a little less rosy with total revenue for the quarter falling by 1.2 per cent over the prior year.

Behind the numbers, both KFC and Pizza Hut continue to struggle with system wide sales, including the impact of exchange rates, falling by 5 per cent and 2 per cent respectively. Fortunately this has been somewhat offset by the rebuilding of restaurant margins, but not by sufficient enough a degree to prevent profits at KFC dipping and profits at Pizza Hut virtually flatlining. Across the quarter, these two traditional engines of growth simply failed to propel the company forward.

One of the key issues for both brands is the relatively slim growth within the US, which in the case of KFC is the division’s single largest market, and in the case of Pizza Hut accounts for the majority of the division’s sales. In our view both suffer from the challenge of maturity and, while they remain popular, the rather tired nature of the brands and a lack of meaningful menu innovation means they struggle to compete against rivals like Chick-Fil-A which are seen as more interesting by consumers. In many ways, both brands need to take a leaf out of the McDonald’s playbook in terms of reinventing themselves to become more relevant to diners.

In contrast the Taco Bell division saw a strong rise in sales on at both total and same restaurant level. Restaurant margins also increased thanks to some favorable cost changes for commodities. While the combination of these things should have resulted in a good uplift in operating profit, a number of one-off costs – which included investment spending, legal fees, and the creation of a scholarship program – put pay to that. For the quarter Taco Bell operating profit declined by 7 per cent.

  • Hakon Helgesen is a retail analyst with Conlumino.

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