Its fair to say that many investors tend to treat
official Chinese statistics with a very large handful of
Consequently, whether it's cooking oil prices, rail freight
throughput or electricity stats, China watchers are constantly
searching for proxies for Chinese growth, consumption and
Well, how about fried chicken? Those searching for an
alternative measure of consumption growth could do worse than
look to US-headquartered fast-food conglomerate Yum!
With almost 4,500 stores across the country, Yum, which
operates three brands in China KFC, Pizza Hut and the
rather unfortunately named Chinese fast-food chain East Dawning
(cue adolescent sniggers, or maybe thats just us)
is far-and-away the largest restaurant operator in
China and its sales and profit numbers therefore offer valuable
insights into the state of the Chinese real economy.
Here are some China-related nuggets (sorry, couldnt
Yums fourth-quarter numbers, which were released
- Yum!s China division revenues totaled $1.9
billion in the fourth quarter and $5.6 billion in 2011
as a whole, up 39% and 35%, respectively
- Yum!s China division accounted for 45.7%
total revenues in the fourth quarter and 44.1% of total
revenues in 2011 as a whole, up from 45.3% and 36.5%,
respectively, in 2010
- China Division system sales increased 29% for the
year and 33% in the fourth quarter, prior to foreign
currency translation, driven by same-store sales growth
and new-unit developments.
- China division same-store sales growth was driven
by a 21% increase in same-store transactions for the
year, including 20% in the fourth quarter.
- KFC same-store sales grew 19% for the year and 22%
in the fourth quarter.
- Pizza Hut Casual Dining same-store sales grew 17%
for the year and 15% in the fourth quarter.
- Pizza Hut Home Service same-store sales grew 19%
for the year and 25% in the fourth quarter.
- China opened a record 656 new units during the
year, including 327 in the fourth
That last zinger is worth pondering for a second: that means
that Yum opened more than three new KFCs or Pizza Huts a day in
China during the final three months of last year. Pretty good
going in a country that many see as having repressed consumer
spending. Imagine how many more Sichuan Pepper Hot Wings and
Old Beijing Twisters they could sell if China would only
liberalise its currency and capital account.
Anyway, we digress. Whats notable is how correlated these
numbers seem to be with
Chinas official retail sales numbers
, which reported
18.1% y-o-y growth in December and 17.1% y-o-y growth in 2011
as a whole.
Perhaps those dodgy Commie" numbers
arent so cooked after all...
Slightly less correlated, however, was Yum!s
reporting of wage inflation and commodity price numbers, which
it blamed for a 2.1% y-o-y decline in restaurant margins.
Quoting again from the earnings release:
|Restaurant margin decreased 2.4
percentage points to 19.7% for the year, driven by
commodity inflation of 8% and wage rate inflation of 20%.
Consistent with expectations, restaurant margin decreased
2.4 percentage points to 15.8% in the fourth quarter.
This decline was driven by 11% commodity inflation and
18% wage rate inflation.
Yums inflation calculations are higher than the
, which reported year-on-year wage growth
of 12.4% in urban areas (where the vast majority of Yum!s
China stores are located), and 21.9% wage growth in rural
areas. The government reported that the purchasing price of
agricultural products rose by 9.1% y-o-y in 2011, while ag
commodity prices rose 16.5% on the year.
Declining margins due to rising input costs may raise more
general profitability concerns about Chinese business
operations and cost-competitiveness.
A safe EM play?
But despite the shrinking margins, Yum! chairman
and CEO David Novak was unsurprisingly keen to stress the
companys strong China performance and its EM
credentials more generally in the earnings release,
describing the companys performance in China as
Clearly, our KFC and Pizza Hut brands in China
continued to strengthen their category-leading
positions. At the same time, Yum! Restaurants
International opened 905 new units, including 622 in
high-growth emerging markets. We are on the ground
floor of growth in India, Russia and Africa, where
system sales grew at strong double-digit rates. For the
year, our emerging market businesses at Yum!
Restaurants International grew system sales 13%, prior
to foreign currency translation, including new-unit
growth of 7%.
Emerging markets contributed nearly 50% of operating
profit at Yum! Restaurants International. The Yum!
growth story is clearly about China and a whole lot
In other words: hey, nervous retail investors in the US and
Europe, if you want to benefit from EM (and in particular
China) growth without having to deal with all of the
complexities of investing in equities in underdeveloped markets
with often dubious reporting requirements and legal frameworks
and, you know, foreigners, were your perfect sideways EM
Growing domestic competition
But, before you call your broker, it is perhaps worth
remembering that Yum is a business operating in an
increasingly crowded fast-food market in China, with a
rising number of local competitors jostling to take a bite out
of its massive market share. And perhaps at some point Chinese
consumers will realize that eating fried chicken several times
a week does not a balanced, healthy diet make.
But, for now at least, there seems to be no quenching
Chinas insatiable appetite for the Colonels secret
recipe, which some might see as an imperfect proxy for Chinese