Fast-food retailer Yum! Brands (
YUM
,
quote
) has become embroiled in a food safety scandal in China (
FXI
,
quote
). How should investors treat this development?
[caption id="attachment_60544" align="alignright" width="300"
caption="KFC in China"]
[/caption]
Allegations surfaced this week
that U.S. firm had injected poultry with certain hormones that
violated Chinese health codes. While the veracity of this claim
remains unknown, Chinese citizens took to Sina's Weibo
microblogging platform (
SINA
,
quote
) to voice their dismay over the alleged actions of the corporation
that runs KFC and Pizza Hut.
Users were almost universally peeved and some even advocated a
boycott of the Kentucky-based firm.
As one would expect from a multinational corporation as well run
as Yum! Brands, the company has already tried to get out ahead of
the scandal. The firm issued a press release disavowing the notion
of any wrongdoing on the company's part.
For investors in Yum! Brands, these developments raise issues as
to how the stock should be evaluated going forward.
Although the stock could see some short-term pressure as the
result of these allegations, assuming that there are no further
revelations, the long-term ramifications of this event should be
minimal. In the past, boycotts of this nature have little staying
power. This event in and of itself is unlikely to change the
long-term story for Yum! Brands in China.
However,
given the struggles of Yum! Brands recently in China
, it's imperative to understand the perception of the firm in
China. While not KFC-specific, as more and more urban Chinese
become increasingly wealthy and cognizant of the dangers of
excessive fried food, an increased emphasis is being placed on food
quality and healthiness. Fast food chains like Yum! Brands still
have plenty of expansion opportunities in second and third-tier
cities, but it remains to be seen the kind of further expansion the
company will undertake in Shanghai and Beijing.
This is evidenced when juxtaposing recent results between
Starbucks (
SBUX
,
quote
) and Yum! Brands. While the less-cosmopolitan KFC indicated a weak
Chinese consumer, the more aspirational Starbucks saw no such
drop-off.
These happenings are by no reason to go short Yum! Brands;
however, it's imperative for investors not to treat China as a
monolithic entity. By evaluating China through a more nuanced
prism, it becomes evident that there are plenty of growth
opportunities for Western fast food companies, but they lie mostly
outside of Beijing and Shanghai.
Disclosure: Author's family is long SBUX and YUM
