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Yum! Brands tumbles on safety scares

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Yum! Brands tumbles on safety scares

Shares of Yum! Brands (NYSE:YUM) traded sharply lower after the market close on Monday as the company’s reported poor Chinese sales data for the month of July. A number of food safety scares and a bird flu outbreak in the company’s most important market have caused great pain for shareholders as of late. Yum! announced its same store sales dropped by 13%, far steeper than the analyst anticipated drop of 7.1% for the month. Following the release shares traded down by 4% to $71.50 per share.

In recent years the company has generated almost all of its impressive growth from China and up until late last year it didn’t appear the growth would slow anytime soon. However, in late 2012 safety concerns made headlines through the country causing consumers to avoid the company’s KFC brand. While the bird flu epidemic may have come to an end, it is obvious the effects still linger and run deep. Moreover, increasing competition within the quick service restaurant space should hurt the company’s powerful market position. Competitors including McDonald’s  Domino’s, and Burger Kings have all hinted at increasing their brand presence over the last few quarters.

This time of struggle comes at a time of struggle within China itself. The days of double digit gross domestic product growth are over. Instead the company is fighting to stay above 7% growth as analysts become increasingly bearish of the longer term growth prospects. Wage growth for consumers has slowed as manufacturing has stumbled of late, these declines should be directly correlated to the growth of Yum! Brands. While quick service food may seem like an inferior good in the developed world, the opposite is true in developing countries. It will be interesting to see if the company can overcome these challenges, if not, valuation contraction seems likely over the coming quarters.

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