Yum's KFC Is Recovering From Bird Flu In China, But It's Still Under Threat

KFC and Pizza Hut are two of the biggest fast-food names in China, and their Chinese stores bring in half the global revenue of their parent, Yum Brands (NYSE:YUM). But both chains are still struggling in the wake of chicken-related food scares that have deeply cut customer traffic over the past year.

Yum's sales in China are recovering but still down 20 percent from a year ago, Bloomberg reported on Thursday (July 11). That's an improvement from the previous quarter when Chinese sales were down 29 percent, and June same-store sales were only down 10 percent. Worldwide, Yum's net income was down 15 percent year over year.

That trend—29 to 20 to 10 percent—is encouraging. So is the fact that customers are coming back into restaurants after a bird-flu scare earlier this year that hurt KFC, where there may have been fears that chicken carried the disease, but also at all restaurants (though KFC was hit harder than other chains).

But Yum may not be out of the woods in China, where authorities have begun to crack down on all foreign-owned food suppliers. In May, investigators said a Yum hot-pot chain called Little Sheep had purchased fake mutton that was actually made from fox, mink and rat meat. The chain was eventually cleared after an investigation.

And last Friday (July 5), the head of China's market watchdog agency said it was investigating a number of foreign food suppliers for possible monopoly violations, including Tetra Pak and Nestle. Drug makers, including GlaxoSmithKline, are being probed separately, according to Bloomberg.

Those increased investigations—especially with the record of Chinese authorities for accusing foreign companies on flimsy evidence—could put a damper on Yum's China recovery plans. Even if Yum keeps its own reputation squeaky clean, all foreign companies are likely to be painted with the same brush for political reasons.

For more:

- See this Bloomberg story
- See this earlier Bloomberg story

Related stories:

Bird Flu Slows in China; KFC's Sales Plunge
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Is There Evidence Of Fake Mutton At A Yum Chain In China?