(Reuters Breakingviews) - The wrong mix of ingredients is flavoring Yum China’s (9987.HK) strategic recipe. Boss Joey Wat plans to open as many as 1,200 new stores for the KFC, Pizza Hut, Taco Bell, and Lavazza coffee chain operator this year. Starbucks (SBUX.O) is also proceeding with aggressive expansion. Both may be underestimating the extent of the country’s consumer weakness.
It was an especially distasteful fourth quarter. Yum China’s adjusted net profit plunged 93% in the last three months of 2021, and even deeper plunge than when Covid-19 first struck. Beijing’s fiscal support also diminished: Yum China says it received some $90 million less in one-time relief last year than in 2020. At Starbucks, sales at locations open for at least 13 months slumped 14% in the quarter ended Jan. 2.
The worst is far from over if the weeklong Lunar New Year holiday earlier this month is any guide. A nearly 50% recovery in the number of people traveling home to welcome in the Year of the Tiger didn’t provide the usual spending spark. Movie box-office sales contracted more than 20% from last year, according to film industry research outfit Taopiaopiao, and official data indicated tourism revenue was 40% below pre-pandemic levels. Many avoided restaurants and shops, opting instead for self-imposed home isolation.
The pandemic may have provided some flattering indications of resilience. Yum China and others, for example, are squeezing concessions from landlords as smaller rivals collapse. At the same time, they’re hardly immune to the worsening economy. In January alone, Yum China temporarily closed more than 500 stores.
Wat justified the bold growth plans, which will cost up to $1 billion, by citing the quick path to breakeven. It typically takes two years for a KFC site. Haidilao (6862.HK) is a cautionary tale, however.
China’s largest hotpot chain takes pride in making new stores profitable in just six months but was forced to shut about 300 restaurants last year after opening over 500 in 2020, conceding missteps in its rapid expansion. The company has lost nearly 80% of its market value since peaking a year ago. Even for deep-pocketed and more diversified multinational companies, overconfidence about Chinese consumers is getting harder to digest.
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CONTEXT NEWS
- Yum China on Feb. 9 reported that its adjusted net income declined 93% in the fourth quarter, to $11 million, from the same period a year earlier. Revenue increased 1% to $2.3 billion.
- The company’s shares fell 3% to HK$347.40.