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 People like Li Jiali, a 20-year-old Shanghai student, say they have
all the dining options they need nestling in their phones, without
needing to venture out of the house. Yum's shares dived this week
after it said it's way behind target in a bid to recover from
damaging food scandals in China, its top driver for profit and
revenue.
Li's Huawei smartphone is packed with cut-price food delivery apps
from some of China's biggest internet firms, like Baidu Inc's Waimai,
Alibaba-linked Meituan and Tencent-backed Ele.me - meaning
"Hungry?". These allow thousands of mom-and-pop restaurants to lure
diners previously beyond their marketing reach.
"On my phone I have Meituan, Baidu and Ele.me, and I use whichever
one has the biggest discount," Li said. Baidu's platform is
currently offering the best deals at around 40 percent off, she
said, evidence of a price war raging online.
Yum this week pointed the finger at a "savage battle" under way
between apps to explain why China same-store sales grew only 2
percent in the third quarter, well below the expected 9.6 percent
jump. Yum cut its global forecasts on weakness in China, where the
firm has been whipsawed by food safety scandals and marketing
missteps over the last few years.
The rise of online apps is a extra blow to Yum, already facing a
crowded fast food market, where consultants Euromonitor forecast
growth will slow to around 4 percent by 2019, less than a third of
the pace a decade before.
"We are experiencing what we believe is a short-term but significant
impact of online ordering aggregators entering the casual dining
space," Yum's chief financial officer Pat Grismer said on an
earnings call after the results.
The company's executives also cited a dud marketing campaign at its
Pizza Hut brand and slowing growth in the world's second-biggest
economy hitting consumers' willingness to fork out on discretionary
spending. Shares sank nearly 20 percent after the earnings report.
LEVELING OUT
Yum's stumble also undermined bullish predictions earlier in the
year, when the firm pegged global growth targets to a then-hoped-for
sharp second-half China bounce, posing a problem for newly installed
China boss Micky Pant.
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"Apps like this level the playing field so that every venue has its
virtual spot that's equal," said Stone Shi, Shanghai-based founder
and Chief Executive of restaurant search platform Bon App. "It used
to about being a household name in one sector - pizza, pasta, fast
food etcetera. Now people want to see what else is out there."
Yum did not respond to specific queries after the earnings
disclosure on how the firm would combat the rise of online platforms
in China.
The firm, which has 6,867 restaurants in the country, now also faces
the challenge of reviving growth when consumers are redirecting
spending from food to other areas such as healthcare and transport,
analysts said.
"(Chinese) consumers now really watch what they are spending," said
Edward Jones senior analyst Jack Russo.
Yum's executives say they remain bullish on China in the long-term.
But the concern for investors is how the U.S. chain was caught out
so dramatically - and whether headwinds such as online apps will
continue to cause a drag in the market.
"The apps will always survive, though whether the companies that are
currently powering those apps survive is another question," said
Mark Secchia, founder of Shanghai-based food delivery platform
Sherpa's.
"These guys are only going to get busier in a down market."
(Additional reporting by Lisa Baertlein in LOS ANGELES, Donny Kwok
in HONG KONG and SHANGHAI newsroom; Editing by Kenneth Maxwell)
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