RETAIL: KFC, Mondelez Suffer From China Slowdown
Bottom line: Retailers like Yum and Mondelez are increasingly suffering from weak China sales due to a local slowing economy, and are unlikely to return to rapid growth of previous years over the short- to medium-term.
Two separate stories involving major western food retailers paint a gloomy picture for the China market, which is losing momentum in tandem with the country’s slowing economy. One headline has Yum Brands (NYSE: YUM), operator of the KFC fast food chain, announcing results that continued to be weak in this year’s second quarter, despite a major overhaul for its China operation and the fading impact of a major food safety scandal a year ago. The other news has Mondelez International (Nasdaq: MDLZ), maker of Oreos cookies, reportedly making major adjustments to its China operations, in a move that one insider says is the equivalent of lay-offs.
Market watchers have fixated on the KFC story for much of the last 2 years, as the fast food giant saw its best performing market for 2 decades suddenly start to sputter. Much of the blame was placed on company-specific factors, including several food safety scandals and also a bird flu scare more than 2 years ago. Yum also finally realized that its KFC stores and menu were in dire need of a facelift after more than 2 decades in the market, and has moved aggressively to update the chain by making it more modern and high-tech.
And yet despite all that, the company reported its same-store China sales plunged 10 percent in this year’s second quarter, far more than an 8.4 percent drop that analysts were expecting. (English article； Chinese article) Company-wide sales fell 3.1 percent to $3.1 billion, marking a fourth consecutive quarter of revenue declines.
Yum has said that restoring growth at its KFC China stores, which account for more than half of its total revenue, is a top priority. I’ve personally visited some of its stores since the overhaul began and think they are much improved, and the scandal a year ago involving one of Yum’s top meat suppliers has largely faded from public memory.
That leads me to believe that China’s slowing economy is becoming a growing factor in Yum’s inability to jump-start its China operations, which doesn’t really bode well for the company over the next 1-3 years. Many restaurant owners throughout China complain that business is down in general, as local consumers trim back their spending due to uncertainty about the economy.
Stealth Lay-offs
Such uncertainty may also be a factor behind the reports about Mondelez, whose low-key China overhaul was disclosed in a media report citing an unnamed company insider. (Chinese article) According to the insider, Mondelez is shifting a big portion of its sales team to various third-party distributors, in a move that he believes is the equivalent of job cuts. Mondelez acknowledged it was in the process of making an adjustment to its workforce to better serve the market, but declined to give more specifics.
I’m not privy to any insider information, but based purely on this report I would tend to believe the company insider’s view that this move looks like Mondelez’s way of trimming costs and laying off workers, probably due to slowing sales. Foreign companies face far more scrutiny and costs in general than Chinese ones when laying off workers. Thus it would be much easier and less costly for Mondelez to transfer salespeople to a third-party local partner, who could then cut jobs more easily than the high-profile parent.
Both Mondelez and KFC are probably suffering from growing competition from local brands, as Chinese companies improve their products and services to approach levels offered by foreign brands. But I really do sense that slowing sales at both companies are increasingly the result of China’s broader economic slowdown, and that both domestic and international retailers are due for much slower growth in the market over the next 5 years.
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