Two U.S. high-flyers that have relied heavily on the China story to fuel their growth are suddenly going into proactive mode, with KFC's parent Yum (NYSE: YUM) and personal care products maker Herbalife (NYSE: HLF) both taking new steps to avoid repeats of previous recent disasters. In the former case, Yum has said that so far it sees no signs of declining business at its China KFC stores as we head into the height of the current bird flu season. Meantime, Herbalife is trumpeting its receipt of a quality designation for its products in Taiwan, as it seeks to avoid repeating a disaster at rival Nu Skin (NYSE: NUS) in China last month.
Both cases illustrate how China is quickly becoming a double-edged sword for western companies that once looked to the market for major new growth. On the one hand, China's 1.3 billion consumers have become fertile ground for many major western consumer names, with companies like Wal-Mart (NYSE: WMT) and Procter & Gamble (NYSE: PG) also finding success there. But many of those same names are also discovering the market can be a tricky place due to negative publicity and fickle consumers whose biggest priority is low prices.
All that said, let's start off by looking at Yum, which is bracing for trouble as the number of new cases of the virulent H7N9 bird flu virus in humans gains momentum. KFC took a major hit in China last year around this time, after the H7N9 strain first exploded on the scene, killing many of the people it infected. Worries that eating chicken could spread the virus caused KFC's business to drop by half or more at some stores, particularly in the Shanghai area at the heart of the outbreak.
Now the company has come out and said it has yet to see any direct impact on its China sales this year despite the growing number of new bird flu cases (English article). China health authorities had confirmed 127 cases of H7N9 human bird flu infections in January, and the Xinhua news agency has reported 21 people have died of the disease so far this year.
I can personally say that no one I know here in Shanghai has grown too alarmed about the problem yet, though one or two friends have cautioned me about eating chicken. The city has smartly closed down all live bird markets to lower chances of another major outbreak. I expect the number of cases will accelerate as flu season progresses, and KFC will inevitably see a drop in business as a result. But if the situation remains under control, the impact is likely to be far smaller than last year.
Meantime, Herbalife is in a slightly different situation as it seeks to avoid a similar fate to Nu Skin, which came under government criticism last month for its aggressive sales tactics (previous post). Herbalife and Nu Skin both sell their products through salespeople who meet privately with customers rather than in traditional stores. Both are frequently accused in the west of running pyramid schemes that encourage employees to recruit more salespeople and engage in aggressive selling tactics, though each deny such practices.
Now Herbalife has announced that Taiwan's Institute For Biotechnology and Medicine Industry has awarded the company with its symbol for national quality (company announcement). This particular announcement doesn't look very substantive to me, and is almost certainly aimed at boosting Herbalife's image in the eyes of regulators in neighboring China. But the real issue is the company's sales tactics and not its product quality, and I doubt this new announcement will ease pressure that Herbalife is feeling to reform its business practices in China.
Bottom line: KFC is likely to suffer a limited hit in China due to bird flu fears this year, while Herbalife is likely to follow Nu Skin in coming under scrutiny for its aggressive business practices.
Disclosure: No positions