David Novak, CEO of Yum Brands, Inc., admitted a “poultry supply chain” issue in China as he spoke with investors today. The fallout from that incident sank into investors, who sank the stock by 4% after the report.
During the call, Novak acknowledged that a Chinese Central Television (CCTV) investigative program has damaged its Kentucky Fried Chicken business. Yum’s KFC purchased the poultry from farmers who overused antibiotics in their chickens. The fact was originally revealed during segments aired on CCTV.
Although Novak tried to put a positive spin on the situation, investor reaction indicated great concern over the effect on Yum’s bottom line. Yum Restaurants International has relied on China to drive growth recently. Over half of its operating profits and sales are derived from China. This revenue will be sorely missed by Yum management.
YRI’s KFC chain was the first “quick-service restaurant” to enter China, and has been the top chain in the category, according to its website:
“Yum! Brands is focused on building leading brands in China in every significant category,” reads a statement on Yum’s website. “We are the leading retail developer in China with nearly 5,000 restaurants in more than 800 cities.”
The CCTV report did not result in any sanctions or fines by Chinese authorities against KFC or Yum, as Novak was quick to point out. But KFC was flogged on social media, and sales are expected to drop for at least the next year.
It is difficult to express how dramatically this has affected Yum. The numbers help to paint the picture: it has completely erased an expected earnings-per-share increase of 10% during this year. And sales are predicted to drop 25% during the first two months of this year.
The Louisville, Ky. headquartered Fortune 500 corporation counts Taco Bell, KFC, Pizza Hut and WingStreet among its portfolio of restaurants. Yum hopes to turn around and recover from the media storm in China faster than critics and analysts have predicted.
