Bird Flu Hits Shanghai Travel, Dining Sectors
Much is being written about the flurry of H7N9 bird flu cases in and around Shanghai, but few of the stories are focusing on the impact the outbreak is having on businesses. Chicken farmers and sellers are taking an obvious hit, but restaurants with a heavy presence of chicken and pork on their menus and Shanghai-based event organizers and supporting industries like hotels and airlines are also likely to suffer in this current bird flu event.In the restaurant category, the biggest victim of the bird flu scare is likely to be Yum Brands’ (NYSE: YUM) KFC, which counts chicken as the primary item on its menus. The scare has also just prompted auto parts maker Delphi (NYSE: DLPH) to reschedule a major event that was set to take place later this month in Shanghai, delaying it until September.
KFC has been decidedly quiet about the bird flu outbreak so far and the impact on its business. From a safety perspective I have little doubt that KFC chicken products are still quite safe, since most of the company’s products are heavily deep fried and cooking kills all flu viruses.
But that reassurance won’t ease the concerns of worried consumers in China’s largest city, which is a huge part of the Chinese business for many domestic and international companies. Last Sunday I lunched with one friend and attended a dinner banquet hosted by another, and both pork and chicken were noticeably absent from our dining selections in both cases.
KFC is already hurting in China from an overheated expansion in the market, combined with a recent scandal involving its purchases of chickens containing trace levels of growth hormones. Those 2 factors have hit Yum’s China sales in the last 2 quarters, with same-store sales down 6 percent in the fourth quarter. (previous post)
Yum hasn’t reported its first-quarter sales yet, but I expect we’ll see another decline for its latest reporting period. Anyone who was hoping for a rebound in the second quarter will probably have to wait a bit longer, since this bird flu scare is likely to hit Yum’s China sales yet again. Other big names that could feel the pinch include McDonalds (NYSE: MCD), though its focus on hamburgers and fish will probably insulate it a bit more from the downturn.
Meantime, let’s take a quick look at the Delphi announcement, which is quite straightforward. The company directly blames bird flu for the decision to postpone its China Investor Day to September 26 from a previously planned April 22. (company announcement)
I suspect that many other event organizers are considering similar moves, especially foreign companies like Delphi. Chinese companies may be more reluctant to make such moves, since many are subject to political pressures from both local governments and Beijing, which want to avoid any semblance of panic surrounding the current limited outbreak. Thus I wouldn’t expect to see any big changes for the upcoming Shanghai Auto Show later this month, though attendance could be down at this year’s edition of the major event.
I also expect industries that cater to the travel and tourism sectors to take a hit as visitors avoid Shanghai and events are either cancelled or see their attendance drop sharply. The big 3 US-listed budget hotel operators, Home Inns (Nasdaq: HMIN), China Lodging (Nasdaq: HTHT) and 7 Days (NYSE: SVN) are all likely to feel the pinch, as is Shanghai-based Jin Jiang (Shanghai: 600754). Airlines could also suffer, with Shanghai-based China Eastern (HKEx: 670; Shanghai: 600115; NYSE: CEA) likely to feel the biggest effect.
Luckily for everyone, this outbreak is likely to be short-lived since flu season is nearing an end with the arrival of spring. What’s more, the outbreak is likely to be a one-time event, meaning it shouldn’t have any long-term impact on the companies. Still, the effects will be noticeable for many of these firms in their second quarter results, perhaps providing a good buying opportunity after the bad news comes out.
Bottom line: Shanghai’s bird flu outbreak is likely to hit the restaurant and travel-related sectors, but its impact will be mostly felt in the second quarter.
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