* Yum Brands stock down more than 11 percent since warning
* Consumers cite price rise, rumors about safety issues
* Analysts say company handled prior downturns well
By Lisa Baertlein
NEW YORK, Dec 5 A slowdown in China's economy is
not the only strain on Kentucky Fried Chicken's business in the
country, where competition is getting tougher and customers are
KFC parent Yum Brands Inc warned last week that it
expected sales at established restaurants in China to fall 4
percent in the fourth quarter, despite an improvement in
economic indicators such as consumer confidence and retail
sales. Yum shares are down more than 11 percent since the
Interviews with diners in Shanghai and Beijing, and a review
of comments on Sina Weibo - China's equivalent to Twitter - show
many diners are unhappy with KFC's half a dozen or so price
increases in recent years, as well as changes in the local menu.
The new products "are horrible, not as good as before," said
Queen Hu, 24, a consultant at accounting firm PwC. She used to
eat frequently at KFC when she was in college, but has since cut
back to about two to three times a year.
Yum will hold an investor day on Thursday where it is likely
to face tough questions about its China business, which
contributes more than half of its revenue and operating profit.
Investors want to know whether the fourth quarter decline is a
one-off, or a sign of real problems in the China market.
Many analysts expect the company to successfully navigate
the slowdown, even as some forecast the rough patch could
stretch into the middle of next year as Chinese consumers
grapple with cooling economic growth and a once-in-a-decade
"It has yet to be seen what measures the country's new
leadership will take to stimulate demand, but it is quite
possible that the Chinese consumer will remain cautious over the
near to medium term," UBS analyst David Palmer wrote in a client
The U.S. company was a pioneer in China and remains the
largest Western restaurant operator there, with roughly 4,800
(mostly KFC) outlets in the country.
Yum shares were trading 0.4 percent higher at $66.17 on
Wednesday afternoon. Just before the China performance warning,
the stock closed at an all-time high of $74.74 on Nov. 29.
RUMOR MILL BITES
Yum's problem is not just bad reviews - a false rumor about
food quality also appears to be dogging the company.
A Yum spokesman dismissed as "untrue" media reports from
late November that the supplier of 1 percent of KFC's chicken in
China was giving its birds feed containing toxic additives. He
declined to say whether the rumors hurt Yum's sales results.
Chinese agricultural officials have also dismissed the
rumors and said publicly the supplier was safe.
Food safety is a hot issue in China, where there are daily
reports in local media about toxins found in various food
As a foreign brand, generally considered higher quality in
China, the KFC rumors triggered an outsize reaction, one that
has not completely died down on popular Internet forums.
"Foreign food companies are powerful because people trust
them - they trust that their food is safe," Hu said. "But now
they have the same problems as Chinese companies, which mean
that a price increase is unreasonable."
Competition is also on the rise, including from U.S.
powerhouses such as McDonald's Corp, Starbucks Corp
Jiao Guang, 25, a driver in Beijing, said he eats fast-food
all the time and prefers McDonald's over KFC, which is generally
more upscale in China than in the United States.
"I like more snack foods, McDonald's has snacks whereas KFC
is a full meal," he said.
Chains from China and other parts of Asia are also turning
up the heat. They include Taiwan-owned Dico's, a fried chicken
chain that takes direct aim at KFC; Ajisen (China) Holdings Ltd
, a Japanese-style noodle chain; and a host of Chinese
chains such as Golden Jaguar, Yonghe King and Country Style
Even as Yum broke the bad news about China to investors last
week, Chief Executive David Novak vowed 2013 would be a strong
year for the China division.
Still, Yum faces daunting hurdles through the second quarter
of 2013 because it has to post growth that compares with the
double-digit percentage same-restaurant sales gains of recent
"They've had very strong results for a long time and now
they're lapping that. All the signs point to this being a
temporary ... deceleration," Bernstein Research analyst Sara
(Additional reporting by Reuters Shanghai and Beijing
newsrooms.; Editing by Ben Berkowitz and Andre Grenon)