KFC and Pizza Hut may not be standard economic indicators, but they're flashing a warning sign about the state of the Chinese economy right now.
Yum Brands, the US food giant that has made an enormous push into China, came out with some grim results late on Tuesday. The stock plunged 19% in after-hours trading.
The company owns KFC, Taco Bell, and Pizza Hut, and as Business Insider's Akin Oyedele notes, more than half of its business is done in China.
"China is all that really matters, and results there and outlook were significant disappointments," Morgan Stanley's John Glass said.
So it's not good news for the company or the country that KFC sales rose by only 3%year-on-year.
Pizza Hut's performance is even more worrying, with a 1% fall. By Chinese standards, those are pretty dreadful growth figures.
In recent years, with consumer spending struggling in the world's advanced economies, reliance on China has been a good bet. Yum's share price rose by 120% between May 2010 and May 2015, for example:
But China is now making a difficult transition away from the investment binge of the post-2008 period, toward a services-led consumer economy, which is often called the "middle-income trap." It's a leap not everyone manages to make.
For that, Chinese manufacturing will probably grow at a far less spectacular pace, and it will build less, too. Part of the recent slump in commodity prices has been because of falling Chinese demand — the world simply won't need as much concrete, for example, if the country's astonishing city-building programmes aren't so necessary anymore.
Yum has a huge presence in China — it now has 4,889 KFC outlets and 1,705 Pizza Hut units. That flaccid growth isn't just a statistical blip.
Here's what Yum CEO Greg Creed had to say:
The pace of recovery in our China Division is below our expectations. Outside of China, our Taco Bell and KFC Divisions continued to sustain their positive sales momentum while Pizza Hut was relatively flat. Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10%.
Yum suffered from bad press as a result of food supplier safety issues. But analysts doubt that's what's behind the weak numbers.
"While it is still early days since lapping the OSI supplier incident in late July, the top line recovery in China is once again slower than expected, and in our view is another piece of evidence that the issues reach well beyond those related to the food quality concerns," Glass said. "China comps of 2% for the quarter were vs our 8-10% and worse even than the most bearish projections of +5-7%."
"At this point, its hard to imagine that its simply the supplier issue weighing on sales," Glass continued, adding that "macro pressures" likely contributed to the weakness.
The results are the opposite of those seen by Nike, with footwear sales up by an impressive 36%. Strong sales of things like footwear and fried chicken are exactly what China wants to see right now.
It's worth noting that companies like KFC and Pizza Hut don't have the same down-market reputation in China as they do in the US or Europe. Being able to eat at them is a pretty middle-class spending choice.
The way China's growing middle class chooses to spend (or not) will make or break those rebalancing efforts, and that matters for the whole world given the way the country has propped up global growth since the 2008 financial crisis.
If China won't eat KFC, the world has a problem.
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