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?
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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
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.