Yum Concedes Missteps in China; More Innovation Was Needed After KFC Chicken-Safety Scare

Yum Concedes Missteps in China

More Innovation Was Needed After KFC Chicken-Safety Scare

LAURIE BURKITT and JULIE JARGON

Updated Oct. 9, 2013 1:40 p.m. ET

A lack of innovation and other missteps by Yum Brands Inc. YUM -6.76% in China are accelerating the slide of what was long one of the most successful foreign businesses in the world’s biggest emerging market. Yum executives acknowledged Wednesday that consumer fears over food safety have had a longer-lasting effect on China sales than expected—especially at its 4,463 KFC outlets in the country—and that its business there hasn’t been innovative enough with its menu offerings.The Louisville, Ky., company on Tuesday said third-quarter profit fell 68% as sales in China, its largest market, slipped 2% from a year earlier. Sales at China stores that have been open at least a year sank 11% in the period, more than analysts’ expectations of a 6% drop. Yum’s shares were off 7.8% on the New York Stock Exchange on Wednesday afternoon.

Yum’s China business soared for years as the country’s increasingly wealthy consumers flocked to its KFC and Pizza Hut outlets. China accounted for half of Yum’s $13.6 billion in global revenue in 2012, and 44% of its operating profit.

But its slump there has now lasted a year. Yum warned in November that sales in China had started slipping, then in December told U.S. investors that a Chinese state media report on a government probe of improper antibiotics use by its chicken suppliers was hurting KFC sales further. An avian-flu outbreak in the spring made jittery consumers even more wary of eating chicken.

In 2011 and early 2012, “Everything was firing on all cylinders,” Sam Su , Yum’s chief executive in China, said in a February interview. But the company underestimated the difficulty matching that sales growth, he said. “That’s a challenge we have to face,” he added.

Now, Yum is preparing to embark on its latest phase of a publicity campaign aimed at assuring consumers its chicken is safe. Next month it will launch “I commit,” an advertising and social-media blitz enlisting employees and poultry suppliers, who will proclaim that “KFC is safe for my family, friends, and me and, hence, safe for you,” Yum Chief Executive David Novak told investors on Wednesday.

Mr. Novak said social-media commentary about KFC “exacerbated the issue and kept the dialogue alive” and that “while we have announced process improvements, communicated the trust message and have had value promotions, frankly, we haven’t had the kind of major innovation that could turn the tide.”

He said the company plans to launch some major menu innovations in the months to come.

Consultants say Yum also has suffered from complacency. Fast-food rivals have flooded China with newer offerings and fresher looks, but Yum’s stores remain largely unchanged from its entry in the late 1980s, said Ben Cavender , a senior analyst at China Market Research Group.

Dicos, a fried-chicken chain owned by Ting Hsin International Group of Taiwan, has rolled out more than 2,000 stores across China in recent years, many of which look more updated than Yum’s KFC, said Mr. Cavender. McDonald’s Corp. also has been updating its restaurants. Pizza Hut—also owned by Yum—faces more competition in China as rivals such as Papa John’s International Inc. and Chinese restaurant Bellagio Cafe also have opened new stores in recent years.

“When Yum’s growth slowed in the U.S., it looked to China and now they’ve been riding this growth wave for such a long time that they haven’t had to innovate,” said James Button , a senior manager at Shanghai-based consultancy SmithStreet.

Mr. Button said some rivals are doing a better job of introducing brands that play up to a Chinese trend of buying more expensive goods over time. Korean SPC Group launched its Tamati café in China, a more upscale option than its on-the-go bread shop Paris Baguette.

Pondering what to eat at a mall food court that has Western and Chinese fast-food chains, visitor Ma Kai said KFC wasn’t a likely choice. “It’s just not healthy,” the 34-year-old clothing designer said. “We all went because it was so new,” Mr. Ma said, recalling the first time he ate at a KFC in the 1980s, adding, “But there are so many other options with better food now.”

Mr. Ma said he still occasionally goes to KFC, maybe even a few times a month, but he feels a little cheated by Pizza Hut. “I’ve been to Italy now,” he said. “That’s not Italian food.”