Chinese consumers may be losing their appetite for American fast food.
The pullback at the world’s largest restaurant chain coincides with a slowing Chinese economy. That has forced McDonald’s and Yum! Brands Inc. (YUM), which runs the KFC and Pizza Hut chains, to fight back with less-expensive menu items, said Steve West, an analyst at ITG Investment Research in St. Louis.
“We’ve seen a lot of deep discounting by McDonald’s and Yum,” he said. “McDonald’s has been talking about keeping that up in the face of pretty high inflation.”
China’s manufacturing expanded at the slowest pace since December, a government report showed on June 1, adding to signs the nation’s slowdown is worsening. A separate purchasing managers’ index from HSBC Holdings Plc (5) and Markit Economics pointed to a seventh straight contraction, the longest stretch since the global financial crisis.
China responded to the slowdown on June 7 by cutting interest rates for the first time since 2008.
The 1.7 percent same-store sales decline at McDonald’s Asia, Middle East and Africa division last month compared with analysts’ projections for a gain of 3.2 percent, the average of estimates compiled by Consensus Metrix. Globally, sales rose 3.3 percent, trailing an estimate for a 5.2 percent increase.
The chain’s division that includes Asia is “seeing challenging economic conditions, with slow growth in China,” Don Thompson, who will become chief executive officer in July, said during a first-quarter earnings conference call in April. Company-operated margin at restaurants in that region narrowed to 16.9 percent in the first quarter from 17.5 percent a year earlier.
McDonald’s has tried to lure customers to its 1,500 stores in China with value lunch items and a new chicken burger.
The company will start selling a value-priced dinner in China “in the coming months,” Thompson said in April.
A slowing Chinese economy comes at a time when Yum is betting on the growing middle class to help it expand. The Louisville, Kentucky-based company, which generated 44 percent of its revenue in China last year and already has more than 4,600 restaurants there, plans to open another 600 locations this year.
McDonald’s is scheduled to report second-quarter earnings on July 23. Net income excluding some items is projected to increase less than 1 percent, according to the average of analysts’ estimates compiled by Bloomberg. That would be the weakest quarterly earnings growth in three years.
Profit growth at Yum, scheduled to release second-quarter results on July 13, is also slipping. Net income excluding certain items may rise 4.2 percent, which would be the slowest growth since 2008, according to analysts’ estimates compiled by Bloomberg.
While “China is slowing to some degree,” it’s still a profitable market for fast-food chains, said Larry Miller, an analyst at RBC Capital Markets in Atlanta, who rates McDonald’s and Yum the equivalent of buy. “I don’t think these guys are making a bad bet.”
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