Yum China, the company behind China’s dominant fast food brand KFC, has been significantly hit by a steep rise in poultry prices, in a knock-on effect from African swine fever, according to its non-executive chairman.
“Poultry price has gone up because of African swine fever and the substitution away from pork to chicken. So the cost has gone up,” said Fred Hu, founder of Beijing-based global investment firm Primavera Capital Group, and non-executive chairman of Yum China.
The impact on the company that buys a billion chickens a year in China has been significant and “has definitely put up the pressures,” said Hu. He did not say how much the price hike had cost Yum China, which also runs China’s Pizza Hut.
In 2016, the brand spun off from global business Yum Brands and listed on the New York Stock Exchange. It was backed by Hu’s Primavera Capital Group, who invested US$410 million, and fintech company Ant Financial Services Group, who put in US$50 million. (Ant Financial’s parent company, Alibaba, owns the South China Morning Post.)
An epidemic of African swine fever has cut China’s pigs by more than a third over the past year, making pork prices surge and forcing customers to migrate to other meat options. According to the Ministry of Agriculture, the average wholesale price of chicken in big cities rose by more than 33 per cent in October from a year earlier.
“[Impacts] are significant, but then again thanks to [chief executive officer] Joey Wat and her team, they are trying to really improve operating efficiency so as not to raise prices for consumers, so absorbing cost from improving efficiency,” said Hu at the sidelines of the Bloomberg New Economy Forum in Beijing on Thursday.
The former greater China chairman of investment bank Goldman Sachs said the brand was not changing where it sourced its poultry. Hu did not say exactly how the brand are dealing with price increases, only that it was “absorbing the cost”.
KFC, which entered China 32 years ago, now boasts over 6,000 stores in more than 1,000 cities, and employs over 400,000 people. McDonald’s has built 3,000 stores over 29 years, while Burger King – first opened in 2005 – has just over 1,000 across the nation.
Despite immediate headwinds, a recent note by Anne Liang, equity analyst for financial services group Jefferies, said the catering industry is one of China’s most attractive sectors. Consumers are increasingly spending on eating out in “a market with undoubtedly the most stomachs to feed”, she wrote.
Restaurant sales are expected to grow 10 per cent to 6,280 billion yuan, from 2018 to 2022, outpacing retail, according to the report which cited US-based business consulting firm Frost and Sullivan.
Meanwhile a low concentration of chain restaurants in China, compared to the US or Hong Kong, makes them poised to increase market share, said Jefferies.
A more expensive main ingredient, however, may not be the only problem for KFC.
Earlier this week US fried chicken chain Popeye’s signed for a lease in Shanghai, to open next year as its first store in China.
Popeye’s said it wants to build 1,500 restaurants in China over 10 years, aiming to become the country’s top chicken brand.
“I give them credit for the ambition,” said Hu, who has tried Popeye’s chicken. “We take all our competition seriously, but we are not worried.”
Meanwhile, in January Burger King announced plans to add another 1,000 stores over the next three years, to total around 2,000. KFC, responded Hu, opens an average 700 new stores each year in China.
“[The market] is very competitive, competition is good – consumers are given more choice and companies can work to be innovative and more efficient,” said Hu. “We are far ahead the leader … the scale, the footprint, the network is unmatched. No-one comes close to match the iconic appeal of Yum China brands.”
In the note, Jefferies rated Yum China a “buy,” citing its scalable business model in a sector that will benefit from “high growth, favourable policies, consumer preferences and consolidation”. It predicted the brand to have an annual free cash flow of between US$600 and US$900 million, in 2019 to 2022.
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This article Yum China, KFC hit by rising poultry prices in China amid African swine fever epidemic first appeared on South China Morning Post