Yum! Brands Losing Momentum

Robert Hsu, August 03, 2009

The devil outside Pizza Hut was drawing an excited crowd. "Special!" he shouted, "Nine-inch pizza! Deep sea eel pizza! Just $8!"

People were lining up excitedly. The horned devil was dressed in a Pizza Hut uniform, and inside the waiters and waitresses were dressed like witches. Across the street, the Kentucky Fried Chicken storefront glowed and throbbed like a casino.

Welcome to Halloween night in downtown Xi'an, central China. The wait outside Pizza Hut was 25 minutes, but once inside, you'd recognize the Buffalo wings and even the costumes. (But take my word on this: Steer clear of that eel pizza.)

That was the scene at a local Pizza Hut in Xi'an just a few short years ago. At that time, I had just recommended Yum! Brands (NYSE: YUM) -- the parent company for Kentucky Fried Chicken, Pizza Hut and Taco Bell -- to my China Strategy subscribers. Then, the company had an enormous competitive edge over other fast food chains trying to make it in China, because unlike many companies claiming to have a strategy in China, Yum! Brands had the business to back up that claim.

That's because YUM's restaurants were efficient, clean and adaptable to local tastes. In fact, the local KFC menu was 80% different than what you'd find in the U.S. -- side dishes of bamboo shoots and lotus roots in place of coleslaw, which never caught on in the Mainland.

You see, dining out has always played an enormous role in China's food-centered culture. And for quite some time, Yum! Brands was the best opportunity to take advantage of that trend.

However, the competition in China is beginning to evolve -- causing YUM to lose valuable market share. There are many other fast food restaurants providing efficient service, cleanliness and tasty food at low prices in China.

The company's latest earnings reports were still positive, but showed a distinctive slowing. The most telling number was that same-store-sales decreased 1% in the U.S. and 4% in China -- a stark contrast to the 14% growth the previous year.

Considering these recent results and the fact that the company is losing its edge in China, I recommended taking profits on Yum! Brands. And my China Strategy readers banked gains of 44%!

But don't lose heart. I still smell both opportunities and profits in our future. Though YUM is losing its momentum, there are still plenty of Chinese companies offering tantalizing opportunities. To be the first to know, join China Strategy today!

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