A faltering global economy is nail-biting stuff. But for Yum Brands—the owner of KFC—a growing China business means the outlook is still finger-lickin' good.
Yum has hitched its chicken coop firmly to the Chinese wagon. In 2011, 50% of operating profit came from China, compared with 32% from the U.S. With the Chinese consumer one of the few bright spots in the global economy, that is looking like a major positive for the company.
Yum has two options for ramping up China profits: growing same-store sales and expanding its store presence.
The lesson from the last downturn is that the first of these might not hold up so well. In 2009, same-store sales fell 1%. But that was more than offset by the addition of 440 new restaurants, supporting profit growth at 25% year-to-year.
The same pattern could be repeated in 2012. Same-store sales growth is resilient so far, up 14% year on-year in the first quarter. But there are signs that those levels might not be sustained through the year.
Yum competitor McDonald's reported a fall in comparable sales for the wider Asia-Pacific, Middle East and Africa region in May, citing negative results from China.
Even if same-store sales fade, Yum can go larger on the Chinese market. About 4,500 stores in 2011 represented one for every $1.6 billion of China's gross domestic product.
In the U.S., there is a store for every $836 million of GDP. KFC's Colonel is already sending his troops into more Chinese cities, with Yum opening a record 168 new units in the first quarter of 2012.
There are some foxes in the chicken coop. Rising wages and agricultural prices increase costs and eat into margins.
Yum reported wage inflation in the first quarter of 17% year-on-year. Chicken prices are up 7% over the same period. Yum's restaurant margin in China fell to 23.6% in the first quarter of 2012 from 25.1% in the same period in 2011.
A remission in yuan appreciation is also bad news. In 2011, foreign-currency translation contributed 5% of the 20% increase in operating profits as yuan earnings were repatriated to the U.S. at a higher exchange rate...
Source: Argentine Beef Packers S.A.
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