Can Yum Survive its 45-Day Chicken Scandal?

Yum! Brands (NYSE:YUM) – the operator of KFC, Pizza Hut, and Taco Bell restaurants – will report fourth quarter and full-year earnings after the market closes on Monday, and both analysts and investors are wondering the same thing: how hard did the “45-day chicken” exposé dent results.

The term has been used by the Chinese media and blogosphere to describe the chickens used by Yum’s KFC restaurants that were allegedly injected full of dangerous hormones, meant to make the birds grow faster. As Yum stated in a regulatory filing made with the Securities and Exchange Commission in early January, the incident caused same-store sales in China to fall by 6 percent during the last quarter. In comparison, sales grew 9 percent in the first nine months of 2012.

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Despite the damage done by the chicken scandal, the company has not changed its prediction for at least 13 percent earnings-per-share growth for the full year, and analysts believe that it will “just squeak by on its preferred earnings measures,” according to The Wall Street Journal. However, they have cut their 2013 targets for same-store growth and stock price…

China has been a successful market for Yum since the company opened its first store near Beijing’s Tiananmen Square in 1987. In the subsequent 25 years, its KFC, Pizza Hut, and other outlets have grown to 5,400 locations, more than double the number of stores it had five years ago.

Although those stores account for only 14 percent of its global total, the Chinese market is an important one; the majority of stores operating in China and other emerging markets are company-owned, compared to only 11 percent in the United States. Company owned-stores contribute much more to the bottom line, but they also make incidents, like the food-safety scare, much bigger problems. Yum’s competitor McDonald’s (NYSE:MCD), which trades at a lower valuation multiple, has been slower to expand in emerging markets, but its shares have outperformed Yum’s by 23 percent in the two months following the food scare.

As the Journal noted, established fast-food brands find it difficult to achieve high growth in mature markets, making developing countries a far better growth opportunity. However, China also presents a problem for Yum, which was made clear by recent events. The food scare highlighted key problems for multinational companies doing business in China. Their operations in that country face many unpredictable and uncontrollable regulatory and policy shifts, as well as an increasingly competitive commercial environment, reported Forbes, and these factors may cause “significant brand erosion” for Yum in the future.

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