Has fried chicken had its day?

By Duncan Bridgeman

Friday 28th May 2004

KFC has reported negative same-store sales growth for the seventh consecutive quarter. So why doesn't Restaurant Brands just sell the business and buy something else?

According to chief executive Vicki Salmon the answer is simple.

KFC is a $171 million business that contributes 55% of the company's total turnover. Despite the lack of growth, it is still a strong cash flow business that helps fund growth in other areas.

"It's not a business we would ever consider getting rid of," Salmon said.

"In terms of other things up for sale ... you'd be looking at buying three or four other businesses to replace one."

KFC's problems are not unique to New Zealand either, she said. In the US, the franchise is experiencing minus 4% growth as concern about rates of obesity intensifies.

Salmon also argues the business is highly cyclical and it takes time to turn around a large business like KFC.

"This is not an unprofitable business ... we've gone through a tough patch, not just in sales but operationally, and it's going to take time to get back to that level."

Few companies work harder than Restaurant Brands at keeping the business humming along. The next initiative, Salmon said, was to focus on store refurbishment to try and lure more customers.

But the new management must be getting sick of telling the market KFC has again failed to measure up. Same-store sales for the first three months this financial year were down 1.9% on the previous corresponding period with total sales declining 2.1%.

The result was all the more disappointing given a big improvement in the last quarter of 2003/04 when KFC experienced flat sales growth and negative 0.1% same-store sales growth.

The company attributed the misalignment of holidays compared to the same period last year, with ANZAC day falling on a weekend and Easter working in with school holidays.

But this issue would have been forecasted and the problems don't end there. Changes to employment law and in holidays law are already making labour more expensive.

Increasing competitive pressure combined with significant management changes have added to the woes.

Analysts say evidence of even moderate growth for the core KFC brand is scarce. In any case any sign of improvement would take some time to convince the market that growth could be sustained.

Restaurant Brands listed in June 1997 when PepsiCo, the original owner of its fast food chains, began pulling in its worldwide horns.

The shares sold for $2.20, giving the company a market capitalisation of $187 million. At the current price of around $1.25 market cap is $115.7 million.

The 1997 bottom-line profit was $11.1 million. This year's result came in at $8.1 million.

The loss of market cap on the intervening years represents investors' disenchantment with what many had hoped would be a growth stock. The company no longer views KFC as a mature division but still sees further opportunity for organic growth in the New Zealand market.

Salmon believes the business should be fetching growth of between zero and 3% growth.

The good news for Restaurant Brands was the performance of Starbucks, which generated positive same store sales of 5.5% for the quarter. However, as one analyst noted, unfortunately Starbucks comprises only 8% of total sales.

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