Yum Brands said China would surpass the United States as the fast-food restaurant operator’s top profit generator this year, and the Chinese market’s potential is still largely untapped.
Yum has more than 3,700 restaurants in China, mostly KFC outlets, and has a big lead over Western rivals like McDonald’s in the world’s fastest-growing major economy.
China for years has been Yum’s top market for sales growth, and the company expects it could one day have more than 20,000 restaurants there.
“China, we believe, is still on the ground floor of growth,” Yum Chief Executive David Novak said at an investor meeting in New York on Wednesday.
U.S. restaurant companies have limited opportunities to build new units at home and increasingly are looking overseas for new business.
To that end, Yum expects to build 475 new restaurants in China next year and 900 outlets in its other international markets, ranging from Europe to India and Africa.
Yum, which also operates Pizza Hut and Taco Bell restaurants, now gets about 65 percent of its profits from outside the United States and sees that figure rising to 75 percent by 2015 as it continues to expand overseas.
CHINA COSTS IN FOCUS
Yum says it is on track to post 14 percent earnings-per-share growth this year, helped by new restaurant openings in China and its other international markets.
The Louisville, Kentucky-based company last week forecast earnings-per-share growth of at least 10 percent next year.
Through Tuesday, Yum shares were up more than 44 percent this year, compared with a 29 percent rise for McDonald’s.
On Wednesday, McDonald’s posted November sales that missed expectations, in part due to weakness in Japan.
Yum’s China business is very lucrative, with margins topping 20 percent, but costs for labor and commodities like chicken are on the rise.
Yum executives said in October that higher costs for those items could bite margins in the current fourth quarter, and investors are standing by for an update.
Wage increases in China are a double-edged sword for Yum, raising its costs but also putting more money in its customers’ pockets.
Yum has not announced menu price increases, which could help offset higher costs, but executives have left the door open to that option.
McDonald’s last month said it raised menu prices in mainland China to offset higher food costs there.
McDonald’s had 1,135 stores in China at the end of 2009. It plans to open 150 to 175 more this year.
Yum shares were down less than 1 percent at $49.74 in morning trading. McDonald’s shares were down almost 2 percent to $78.83.
