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




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.




KFC China: Straying too Far from Kentucky?


Bloomberg Business Week featured KFC, a Yum brand restaurant, in two recent articles focusing on the brands Chinese storefronts. KFC, a household name in US fast food chains, has been suffering in several different aspects. Originally tied with the name “Kentucky Fried Chicken”, KFC has evoked feelings of unhealthiness with US consumers for years, and has suffered sluggish sales. However, the chains crowning glory has been KFC China which has been a start for Yum brands and been increasingly profitable.

Recently, however, KFC China has suffered from image issues and quality problems, and therefore there sales in China have been dipping. For KFC in the past, unhealthiness was not as much of an issue for its Chinese counterpart, because it brought a unique competitive advantage: its traditional American menu. KFC China took a different approach that may have ruined that competitive advantage, by trying to adapt the menu to the Chinese audience and adding traditional Chinese fare. So far it appears that this was not a wise choice, and consumers are left wondering what happened to their beloved American food. KFC needs to reassess their product design to match the wants of the Chinese customer base.

On top of this reconstructed image issue for KFC China, what may have been even more damaging was quality control issues. A history of poor quality issues can be severely damaging to a brand, especially one associated with the food industry. Consumers take extra precautions with what they are putting into their bodies, so when news of KFC chicken containing “unacceptably high levels of antibiotics” the chain suffered. This on top of already high concerns dealing with avian flu, made Chinese consumers even more skeptical about consuming this product. This illustrates, how damaging a quality issue can be for a brand, as discussed in Chapter six.

KFC China had been so successful in the past, that Yum has considered completely selling the United States stores in order to focus on those abroad that were growing at a much faster rate. However, if they continue to have these image and quality issues in China, getting rid of US stores may be a poor choice.  If KFC abandons its US stores, does that destroy its image of being a classic American restaurant even further? Only time will tell what happens to this brand, but it is crucial that Yum and KFC managers assess this project.

What are your thoughts on KFC and KFC China?

Questions for discussion:

1. Should KFC focus on one brand or the other? Or continue with both?

2. How should a major fast food brand adapt to international markets? Maintain their original image, or add traditional food, specific to the location?

3. Where to you see Yum and KFC moving in the future?

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