Chinese Retail Industry: Yum Brands, Tiffany Feel Asian Giant’s Slump

Yum! Brands Inc. (NYSE: YUM), the restaurant group that owns Pizza Hut, KFC and Taco Bell, has been the most successful of any restaurant chain -- perhaps of any retailer in general -- to penetrate the Chinese market.

With about 5,000 outlets in China, Yum depends heavily on consumer sentiment in the Asian giant; it’s the Louisville, Ky.-based company’s most important market outside of the United States. And right now, it appears that caution is the sentiment as Chinese consumers watch to see how the country’s prolonged transition of power fares. Key government posts, for example, won’t be filled until after the National People’s Congress in March.

“In such trying economic times, political uncertainty is not what foreign governments, companies and investors want from China, the world's most vibrant big economy,” said an editorial Friday in the South China Post.

Prior to disappointing Wall Street in Thursday by announcing contracting sales in China in the fourth quarter and estimating a lower-than-expected earnings-per-share growth of 10 percent next year, Yum’s stock price had gained more than 26 percent since the start of the year. However, on the back of lackluster performance in China in its fourth quarter, the company’s stock price lost nearly 9 percent of its value on Friday.

"Next year will be another strong year for our China division, given this year's record development of at least 800 new units and significant innovation in the pipeline, underpinned by world-class operations," Chief Executive David C. Novak said in the company’s Securities and Exchange Commission filing on Friday. "We are extremely confident Yum! China remains the best growth story in the restaurant industry."

Novak may be right. Recent indicators suggest that the economic slump that hit China a year ago may be over. If so, then by the time the new leadership is put in place the country could be on track to meet growth expectations next year.

Still, when it comes to retail, it may take longer for the characteristically scrupulous Chinese consumers to be freer with their disposable incomes. On Friday, J.P. Morgan analysts pushed McDonald's Corporation (NYSE: MCD) and Starbucks Corporation (NASDAQ: SBUX) as better near-term choices, citing the company’s China view as disappointing, according to Marketwatch.

Analysts with a longer view, however, expect Chinese consumers to loosen their habits as the economy rebounds. And that means more trips to KFC and Pizza Hut.

“We largely view ... same-store sales growth in the mid-single-digit range as achievable over a longer horizon as a result of increased discretionary spending among lower- to middle-class Chinese consumers, as well as the continued maturation of units in lower-tier cities,” said Morningstar economist RJ Hottovy in a research note.

Yum wasn’t the only company to point to a soft Chinese market. New York-based Tiffany & Co.'s (TIF), the high end jewelry retailer, reported a similar 4 percent decline in its Chinese same-store sales this quarter. It cited China as one of the reasons for lowering its earnings per share guidance for its fiscal 2012 to between $3.20 and $3.40, down from between $3.55 and $3.70.

In a conference call on Thursday, the head of investor relations at the company, Mark Aaron, said that Tiffany remains “confident that China will experience significant economic growth in the years ahead.”