China: Fast Food Nation, Too Fast Economy?

With the rise in food prices and labor inflation in China, fast food chains, such as KFC, are planning a rise in prices to offset these factors. Despite the rise in prices, the share price of Yum Brands Inc, KFC’s parent company, increased because this announcement quelled investors’ fears of China’s slowing growth. Reuters reports:

As expected, cost pressures dragged fourth-quarter China restaurant margins down to 15.8 percent from 18.2 percent a year earlier.

Yum wants to bring margins up to around 20 percent for all of 2012 and plans to use higher prices to offset inflation in food prices, labor costs and other items.

Yum also plans to bolster growth by adding another 600 restaurants in China, where its brands include KFC, Pizza Hut, East Dawning and Little Sheep. The additions would bring Yum’s restaurant count to about 5,100.

While Yum’s operations in China and other developing countries have made it a top pick for international investors, the company’s U.S. division has underperformed.

Despite the growth of fast food’s popularity and an increase in consumer spending on things like KFC and Coca-Cola, there are also fears about China’s slowing housing market, which may lead to mixed messages on China’s economy. CNN Money reports:

Coca-Cola (KO, Fortune 500) said Tuesday morning that its profits topped estimates, helped by a 10% jump in volume in China. Emerging markets are a key focus for Coke as the beverage market matures in the U.S.

However, even if the emerging middle class in China is acquiring more of a taste for some of the top Uncle Sam brands, that may not mean that the Chinese economy overall is impervious to potential pain.

One of the biggest concerns facing China is whether or not its real estate market is a bubble along the lines of what happened in the United States in those naughty Aughties. And there is some evidence that the Chinese housing market is cooling … perhaps faster than the government there would like.

On the one hand, you might be able to spin the housing weakness in China as a good thing. It may mean that China’s central bank, which was aggressively raising interest rates and reserve requirements for banks over the past few years to fight inflation, succeeded in killing any asset bubbles.

February 7, 2012 2:39 PM
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Categories: Economy