Avian-Flu Scare Deals Yum Another Blow in China

Taco Bell U.S. Sales Strong, but Overshadowed by China Declines

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The Avian flu is making Yum Brands' China sales sick.

While the company has been enjoying strong sales in the U.S., particularly from its Taco Bell unit, much of that growth is overshadowed by poultry scares in China that have caused sales to plummet in recent months -- most recently because of Avian flu concerns.

Part of a KFC's 'Operation Thunder' to counter Chinese concerns earlier this year.
Part of a KFC's 'Operation Thunder' to counter Chinese concerns earlier this year.

Same-store sales for the first quarter declined 20% in Yum's China division, including a 24% decline at KFC and 2% decline at Pizza Hut. Same-store sales grew 1% at Yum's international division and 2% in the U.S. segment.

Yum CEO David Novak said during a conference call today -- much of which was dedicated to talking about the China division -- that beginning the first week of April, publicity surrounding the latest Avian flu scare in China has had a significant, negative impact on KFC's sales. KFC in China has been struggling since late last December, thanks in part to news from China Central Television, which reported that some KFC suppliers had been using unusually high levels of antibiotics in its chickens. During that quarter, sales in China were down 6%.

The company began to see a sales bounce-back around the Chinese New Year in February, but sales have dropped since Avian flu concerns surfaced earlier this month. Mr. Novak noted that Avian flu scares typically impact the business for a few months, but that the sales drops are ultimately short-lived. Yum last had an Avian-flu issue in 2005. He added that based on the first three weeks in April, the China division expects same-store sales to be down 30% for the month.

Mr. Novak said today that after the chicken-antibiotic news, the company went on an offensive to restore customer confidence, launching what he referred to as "operation thunder." As part of that initiative, the company announced improvements to the supply chain, such as working with suppliers to "eliminate over 1,000 small and less-modern chicken houses where risk could be the highest. We want our suppliers to work with the most sophisticated chicken farms in China." The company launched a quality assurance campaign that included 30-second TV spots.

Mr. Novak assured investors that Yum is poised to have a strong 2013 despite disappointments, noting that the company's operations outside of China are solid and on-target.

Taco Bell sees 6% lift in U.S.
In the U.S., same-store sales for the first quarter increased 2% overall, including a 6% bump at Taco Bell. Same-store sales declined 1% at Pizza Hut and 1% at KFC, results that disappointed Yum executives.

Taco Bell has been enjoying positive sales since last year. Taco Bell's U.S. same store sales were up 8% in 2012, when the chain launched one of its biggest product rollouts ever for the Doritos Locos Taco. Taco Bell during the first quarter of this year launched the second iteration of the Doritos Locos taco product line: the Cool Ranch Doritos Locos taco.

In 2012, the company said it sold 325 million Doritos Locos tacos; the chain also launched its upscale Cantina menu last year, though it's unclear how successful that product line is thus far. It also launched a new tagline, "Live mas," in 2012, and the company said today that the campaign resonates with consumers, though did not go into further detail.

"Our new marketing campaign is resonating well with consumers and the brand is generating lots of excitement in social media," said Yum president Richard Carucci. He said the company expects to sell 100 million Doritos Locos Tacos during the second quarter, and "this continues to be one of the most successful new-product launches in our history." Taco Bell has long promoted value, and Yum noted value as one of its most important aspects to promote.

"In this environment, you win by providing compelling value and innovation," said Mr. Carucci of the U.S. fast food industry. "In hindsight some of our competitors did a better job of this and we did. We expect to fare better the balance of the year," noting that Yum is particularly excited about the recent launch of KFC's newest boneless product.

KFC in the U.S. this month launched one of its biggest product rollouts in decades: Original Recipe boneless chicken. Accompanying that is one of its biggest marketing campaigns in years --currently airing-- in the hopes of restoring relevance and bringing in more customers, particularly millennials, to help boost sales.

Pizza Hut, meanwhile, is currently advertising its Crazy Crust pizza, a product influenced by some of its products overseas.

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