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Yum feeling the heat in China as July sales tumble

People stand in front of a poster of KFC and Pizza Hut in Guangzhou, capital of south China's Guangdong province April 2, 2007. REUTERS/Joe
People stand in front of a poster of KFC and Pizza Hut in Guangzhou, capital of south China's Guangdong province April 2, 2007. REUTERS/Joe

By Lisa Baertlein and Adam Jourdan

LOS ANGELES/SHANGHAI (Reuters) - The heat seems to be getting to KFC parent Yum Brands Inc in China, after the fast-food chain saw China sales slide in July, with some market watchers saying a lack of focus on cooling drinks and ice cream meant diners looked elsewhere as record hot weather gripping the country.

On Monday Yum reported a much steeper-than-expected 13 percent drop in July sales at established restaurants in China as the company strives to bounce back from the double blows of a food safety scare and bird flu outbreak in its top market.

The Chinese sales decline was something of a setback for Louisville, Kentucky-based Yum, which in recent months had seen same-restaurant sales declines ease.

"Because of the heat people were looking for cold drinks and ice cream, so McDonald's, Starbucks Corp, and Haagen-Dazs have been grabbing more share of the late afternoon and evening dining because they have better ice cream and drinks," said Shanghai-based Shaun Rein, managing director of China Market Research Group.

A review of KFC's China website on Tuesday backed this up, with almost every advertisement for hot food. McDonald's, meanwhile, had promotions for its ice cream McFlurry and shaved iced drinks specifically targeting an Asian market.

Local media reported that last month was the hottest July for 140 years, with temperatures hovering close to 40 degrees Celsius. The heat wave has held up so far in August and is expected to break in the middle of the month.

Shares in Yum fell $2.86, or 3.8 percent, to $71.61 in after-hours trading.

Analysts, on average, had expected a 7.1 percent decline in China's July same-restaurant sales, according to Consensus Metrix.

Consultants and analysts said that the weak showing in July suggested Yum's China recovery may take longer than expected.

"We worry that the miss confirms a tougher competitive environment and more cautious consumer spending," said Jefferies in an analyst note after the results.

Yum generates more than half of its overall operating profit in China, where it is the biggest Western restaurant operator with roughly 6,000 mostly KFC restaurants.

Yum executives have repeatedly said that the company has successfully dealt with crises in China before.

In a regulatory filing on Monday, they repeated their forecast for same-restaurant sales in the world's fastest-growing major economy to turn around in the fourth quarter.

Yum's China sales swoon started at the end of 2012, when the discovery of excessive levels of antibiotics in chicken from two of Yum's suppliers prompted government food safety agencies to investigate the company's supply chain.

Yum was not fined by food safety authorities, but it suffered a widespread backlash in the mainstream media and on social media sites.

The July same-restaurant sales result included a 16 percent sales drop at established KFC restaurants, which the company on Monday attributed to "residual effects" of negative publicity surrounding that December poultry supply incident.

Investment Technology Group analyst Steve West said he expects Yum's China recovery to be uneven and that some investors and analysts got "a little ahead of the curve."

Worries about a new bird flu strain gripped China this spring, hurting chicken sales, including at KFC. So far there have been 44 fatalities linked to the H7N9 bird flu virus in China.

While the number of reported cases has fallen sharply, the World Health Organization (WHO) has cautioned against calling the outbreak over because the flu virus does not circulate as easily in warm weather.

There is also concern that China's cooling growth could keep a lid on demand for fried chicken and other fast-food.

Once boasting double-digit growth, China is now expanding at a more modest 7.5 percent rate and there are concerns over credit markets overheating and a bubble in the housing market.

Yum is not the only company struggling with softness in China. McDonald's last week reported that its China same-restaurant sales also declined in July.

(Editing by David Brunnstrom, Leslie Gevirtz, Andrew Hay and Matt Driskill)

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