Yum! Brands third quarter earnings report, released Tuesday, underscored the company's continued struggles in China following the supply chain crisis that surfaced in the beginning of the year.
The company predicted the recovery would take 6 to 9 months initially, but is far less optimistic after same-store sales were down 11 percent in Q3.
"We're very disappointed with these results. They are well below the high expectations we have for our business," CEO David C. Novak said during an earnings call today.
The China business accounts for more than half of Yum!'s profits, so a hit to that market is widespread — Yum!'s overall profits fell nearly 70 percent in Q3. A revised Q4 guidance puts the company "well below" its 11-year track record of double-digital growth.
"We are humbled by this year's performance, but we're confident and determined to turn it around. We're working very hard right now to recover from the one-two punch ... and to rebuild consumer trust in China," Novak said.
Much of the action the company is taking to restore confidence revolves around marketing. In November, the company will launch its "I Commit" quality assurance campaign that involves representatives from the farmers to suppliers communicating that KFC is: "Safe for my family, friends and me, and hence safe for you." The company will leverage social media as it spreads this message and will reiterate that the KFC brand is "part of the fabric of China," Novak said.
KFC China will also focus on its pipeline following the recent introduction of its beef burger. Rollouts will come from the chicken on the bone, chicken wings and beverage categories. Executives said the beef burger has had a good success rate, but it has not inspired the incremental sales that were expected.
"This recovery is not happening as fast as we had hoped. Social media has exacerbated the issue and kept the dialogue alive. And frankly, we haven't had the kind of major innovations that can turn the tide. We are working hard to get back on track and I'm confident we're doing the right things," Novak said.
In the U.S., Taco Bell continued its Doritos Locos- and Cantina Bell-driven momentum, with a 2-percent same-store sales increase. Pizza Hut experienced a 1 percent decline, while KFC fell 4 percent.
Taco Bell, which represents about 60 percent of the company's U.S. business, is gearing up for the national rollout of its breakfast platform in the first half of 2014.
"We are set up for solid growth at Taco Bell. That brand has mojo," Novak said. "Now we know we have a winning proposition with the breakfast platform. Based on our market tests, 90 percent of breakfast sales are incremental. And our franchise leadership has endorsed the launch. We have a unity and a purpose across that franchise system to win."
The focus for Pizza Hut in 2014 will be on its WingStreet co-brand. For the first time, WingStreet will feature national advertising. Pizza Hut recently switched ad agencies to help the concept "breakthrough more aggressively," Novak said.
Pizza Hut China, International and India
Despite the continued China KFC slump, Yum!'s other brands and markets are on track with expectations. Pizza Hut Casual in China turned in 5 percent same-store sales growth. The company is expanding its breakfast platform, which is a "huge opportunity" in China, according to Novak. There are now more than 950 Pizza Hut Casual locations and he added that the company is just getting started in growth, particularly in lower-tier cities.
The Pizza Hut Home Service business also had a strong quarter and with a growing consumer class in China, there is an "enormous demand" for this model in the years ahead, Novak said. Ecommerce is also driving this business, with more than 60 percent of orders coming through online channels.
The International Division sales increased 5 percent, driven by new-unit development and 1 percent same-store sales growth. YRI opened 215 new units in 50 countries during Q3, including 139 in emerging markets. Ninety percent of all new international units were opened by franchisees.
"We are on track to open 1,000 new units in YRI this year, which is a new record for the division," Novak said. The development pipeline for 2014 is also robust, especially in newer markets such as Russia, South Africa and Turkey.
Finally, the company's India Division experienced a 20 percent increase in sales, driven mostly by unit growth.
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