YUM! Brands (YUM) suffering indigestion (Q4 2004 conf call)

Includes: WMT, YUM
by: Ezra Marbach

According to the Beijing Morning Post, YUM! Brands' (ticker: YUM) Kentucky Fried Chicken (KFC) has seen its popularity decline sharply in China due to accusations it used sauces containing cancer-causing elements. Johnson & Johnson (ticker: JNJ) is suffering a similar plight. Here are responses to public opinion surveys regarding these issues, and conference call quotes detailing YUM's success in China.

A report by the China Social Investigation Institute said that of those consumers surveyed:

  • 21% will NOT buy products from YUM's KFC, or JNJ.
  • 27% will buy from them.
  • 52% were not sure.

On whether the companies' handling of recent issues affects consumers' brand fidelity:

  • 46% of respondents said "yes".
  • 13% said "no".
  • 41% were "not

On which company (KFC, JNJ, or SK-II) handled its crisis best:

  • 31% of respondents answered KFC.

Here are selected quotes from YUM's Q4 2004 conference call:

David Novak - Yum! Brands, Inc. - Chairman & CEO

....In our most profitable market, China’s profits were up over 20 percent. Profits are almost $200 million, and we have over 1,200 KFC units...KFC is the leading restaurant brand in China....We opened our first Chinese fast-food restaurant called East Dawning, and we’ve continue testing our Taco Bell casual-dining concept.

....For the full year 2004, KFC China was up 7 percent and Pizza Hut China was up 6 percent in same-store sales.

On why food costs have decreased:

Dave Deno - Yum! Brands, Inc. - CFO & COO

....One, we got better....at our food destruction, which is — and purchasing which is a core strategy of ours now. And two, with the World Trade Organization in China joining and borders opening up and everything else, there is a lot to choose from and that drives down costs, and we’ve gotten that benefit. So two things there, is our own capability, and also the growing favorability of the economic environment in that part of the world.

David Novak - Yum! Brands, Inc. - Chairman & CEO

....We actually built a supply-chain-management function in China, okay? With the target of really dramatically reducing our food costs, and they hit every objective we established.

Dave Deno - Yum! Brands, Inc. - CFO & COO

....And our distribution capability, too. It has been fantastic.

(Quotes are from the CCBN StreetEvents transcript.)

Quick thought: YUM! Brands is expected to announce quarterly earnings on April 20th. We will have to wait until then to determine how consumers actually responded to the accusations.

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