Yum! Stock Takes a Hit: Forecasting Can’t Predict Everything

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Yum! Brand Inc., the company that owns Pizza Hut, KFC and Taco Bell, saw a drop in their stock price Tuesday as they altered their profit forecast for the next year. The change in their forecast was due to multiple factors, the main being the second food-quality scandal in their Chinese locations. Additionally, in their US locations, Pizza Hut has noticed increased competition as their competitors continue to offer steep discounts as well as introducing new items to consumers. Taco bell has also made things difficult as they continue to add new product lines. As these factors continue to take their toll, the difficulties of sales forecasting within the food industry have become glaringly obvious.

The first food scandal that affected Yum! and their stock price occurred in September, when one of their suppliers (OSI Group LLC) was investigated for tampering with food expiration dates. Immediately following the probe, Yum! cut ties with the vendor and took legal action against them. The problem, however, was that the incident made their sales forecasting difficult for the rest of the year. Although they had cut ties with the supplier, public opinion was already affected and sales would also be affected to some extent as well. To compensate for this loss of sales in China, Yum! rolled out $1 items at their US Taco Bell locations. While this did help for the loss of revenue, it made the sales forecasting for the company even more difficult. Not only was it now a guessing game trying to estimate the loss in sales resulting from the food-safety incident, but sales for the newly introduced $1 items would also have to be estimated. To make matters worse, a second food-safety scandal hit the company in July.

In July, a Chinese TV report showed workers at a different supplier reusing meat that had fallen to the floor. Again, Yum! cut ties with the employer and took legal action, but again sales were negatively impacted in their Chinese locations. In the US, Taco Bell continued to complicate the company’s sales forecasting as they introduced yet another new line of items with their breakfast products. Although Taco Bell did manage to increase their sales by 3% as a result of this as well as other strategic moves, it is still a perfect example of the difficulties that exist with sales forecasting.

For any company, forecasting is a difficult task. For a company like Yum!, it almost seems impossible. How do you think forecasting should be carried out at a company like Yum! to avoid these types of problems? Is there a way to factor these types of events into sales forecasts to avoid huge hits to stock prices or is it just a risk of the industry? I personally don’t think that the stock price for companies in this industry should be so dependent on such a volatile number, but I also can’t think of a better way to value them.

Sources:

http://www.bloomberg.com/news/2014-10-07/yum-cuts-profit-forecast-as-china-food-scare-hurts-sales.html

http://www.forbes.com/sites/briansolomon/2014/10/07/kfc-yum-dragged-down-by-chinese-food-safety-scandal/

10 thoughts on “Yum! Stock Takes a Hit: Forecasting Can’t Predict Everything

  1. The issues presented are extremely interesting and definitely relate well to our class! For Yum! to have more on point forecasts, maybe they could do customer surveys in order to get information on who will buy the new products. This would add more work for them, however, so I think it just depends on how necessary accurate forecasting really is to their business. Obviously, they have had 2 unfortunate occurrences involving their suppliers so maybe they need to look to make changes there first. Before signing a contract with a new supplier, they should build trust with that company and make sure their values are aligned.

    In the end, you can never be perfect and with a large company like Yum!. Things like this are going to happen because they have locations all over the world and serve so many customers. I think there is definitely an innate risk in the industry because they are trying to produce quality food in a fast and efficient way. I would advise them to start at the supplier level and think about using consumer information to better predict their forecasts. The good thing about the recent food scandals is that if it were to ever happen again, they now have information from these two experiences to draw from.

  2. I think there is an issue with how Yum! conducts business in this article. Yum! did not learn from their first mistake when they were caught up in the scandal that their meat distributors must have sanitary conditions and not tamper with the health of people whom they are serving it to. So this raises the question in my head why did Yum! not go to the suppliers and inspect the facility themselves and hire a representative to ensure that standards are up to par. So I think that these problems could have been preventable and therefore would have prevented this problem and had an easier schedule to forecast. However, now that public opinion thinks of Yum! as unsanitary its going to be as mason mentioned impossible.

  3. Forecasting is never perfect because of the reasons this article lays out: unforeseeable occurrences. If forecasting would be perfect there would be no reason to ever buy in the stock market as one either buys or sells based on an intrinsic value which is not reflected in the market value. Scandals such as this should always be reflected upon in the market price and I do not agree with you that they have less barring thus causing less market volatility. Management responded correctly by pulling the suppliers and as a result the stock could potentially bounce back as investors put a greater trust in management. Public opinion of a company is also extremely important. The reputation of a company can be ruined in one day after several years of building up the brand, look at the NFL for an example. Factoring in unforeseeable occurrences makes forecasting perfect and that is simply not possible, so despite the attractiveness of the suggestion I do not see it to be possible.

  4. Forecasting is never perfect because of the reasons this article lays out: unforeseeable occurrences. If forecasting would be perfect there would be no reason to ever buy in the stock market as one either buys or sells based on an intrinsic value which is not reflected in the market value. Scandals such as this should always be reflected upon in the market price and I do not agree with you that they should have less barring thus causing less market volatility. Management responded correctly by pulling the suppliers and as a result the stock could potentially bounce back as investors put a greater trust in management. Public opinion of a company is also extremely important. The reputation of a company can be ruined in one day after several years of building up the brand, look at the NFL for an example. Factoring in unforeseeable occurrences makes forecasting perfect and that is simply not possible, so despite the attractiveness of the suggestion I do not see it to be possible.

  5. This topic is very interesting because it deals with how companies attempt to recover from operation failures.Yum brands have cost the company millions of dollars by its negligence to monitor its suppliers. It runs the risk of decreasing their sales because consumers have heard about their low-quality food, but also interrupt their current market trends and forecasting data.Although forecasting is not perfect,this loss will cost the company its earnings and the length for this decrease is unknown. I think that this is harder for companies to come back from than regular forecasting trends. They not only have to account for one products forecasting being changed, but now their whole production line. I do not think that they can accurately plan for these type of situations because they never know what the media will get a hold of, but by creating an ethically responsible company, problems like this shouldn’t take place.

  6. I totally agree with you that it would be difficult for YUM to forecast for next year. I think that sale forecast has been made difficult due to lack of attention by YUM on its suppliers. They should have kept a check and balance on how the suppliers were processing meat. Before even tying the knot with any suppliers they should be made to follow strict rules and regulations.

  7. I am not surprised that yum! can’t be completely accurate with forecasting. Especially with something as random as food/meat. I am not sure what kind of formula can forecast something like this. Management acting in the right manner in this case. Interesting article.

  8. I actually didn’t ever really know who owned those companies, it’s sort of funny to see that now. I think this is interesting, but you asked whether there is a better or more efficient way for Yum! to forecast. I really think this was just a bad year. It looks like you said that in September (I assume September 2013) they had their first scandal than in July of this year. This all seems to have happened within one year of each other, perhaps in two different fiscal years. I feel like they did not necessarily do a poor job forecasting, its just outside events that happened that made their forecasts look out of sync. Perhaps if these events never happened then they would be fairly forecasted with what the actuals could have been without any scandals. That being said, I think they should forecast like they normally do because they can’t plan for scandals and at this point they may have figured out those scandals. I don’t really think there is a way to forecast these events, they just need to assume they won’t happen again. Some litigations can be forecasted if they the company knows they will be in legal suit, but in my opinion they should keep doing what they have been doing and make sure these scandals stop.

  9. I’m not surprised by how hard it is for Yum! to forecast. Events like suppliers messing with food are almost impossible to predict since they are a third party distributor and ultimately out of Yum!s control. However when something like this does make it to the media it will greatly effect sales because no one wants to eat food that could be contaminated or of low quality. I don’t really think there is a way for them to predict another scandal, and they should just hope that it won’t happen again. It is a risk that will always be there when working in the food industry. If anything they need to take more precautions and steps to prevent future supplies from making the same mistake.

  10. Yum! Brand Inc. manages some of the most successful and largest fast food chains in the world, which means that being able to forecast the demand and the profits for their stores worldwide is extremely important to maintaining their success. However, when unforeseen circumstances arise, like modification of expiration dates or reusing meat that was on the floor, it makes it very difficult for a company to be able to predict their sales. The media does a great job of publicizing scandals like this and causing a lot of grief for the company itself, forcing it to take measures to make up for the loss in sales. I also see the correlation between the sales and the difficulty forecasting due to negative news coverage, but I think the only way for a company like Yum! Brand to fix this issue is to pay closer attention to the product they are selling to consumers. The main point of forecasting is to attempt to predict how your company will fare in the future, and that becomes nearly impossible when there are issues with your product, thus changing the buying habits of your customers.

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