China Less Yummy for Yum?

[momopi]

http://blogs.wsj.com/chinarealtime/2010 ... y-for-yum/

China Less Yummy for Yum?

For an inkling of the impact that rising labor costs might have for some foreign companies in China, look at Yum Brands.

In a conference call with investors, the U.S.-based operator of KFC and Pizza Hut restaurants blamed rising Chinese labor costs, in part, for full-year earnings growth estimates issued a day earlier that disappointed investors, sending Yum’s stock down.

“We now expect very high labor inflation in the second half of the year,� Chief Financial Officer Richard Carucci said in the Wednesday call. Executives on the call said Yum expects China labor costs to increase by $32 million in the second half of 2010, after rising $12 million in the first half.

Thousands of workers at KFC restaurants in northeastern China received a wage hike in June following negotiations between the company and the government-backed trade union.

The news about China is hardly all bad for Yum, which has more than 3,500 restaurants in the country. Yum execs point out that rising wages in China have a silver lining — better-compensated workers mean wealthier consumers who can spend more on, say, fried chicken. And Yum is widely seen as a significant beneficiary over the long-term of a gradual appreciation of the Chinese currency, which also increases relative purchasing power of Chinese consumers and makes Yum’s Chinese earnings more valuable in dollar terms.

In its quarterly results Tuesday, Yum said operating profit in its China division in the second quarter rose by 33%. It reported higher second-quarter revenue overall and raised its forecast for full-year earnings to $2.43 a share from $2.39 a share.

But those estimates were still lower than analyst hopes, sending the stock down.

Yum is an outlier — few, if any, other major U.S. corporations are as leveraged to China, which supplied fully a third of Yum’s $421 million in global operating profit in the second quarter.

Still, Yum’s estimates on rising labor costs in China were a sobering indicator that the trend will sting for some foreign companies, at least in the short-term.

– Brian Spegele

[momopi]

Comments from reader:

4:12 am July 16, 2010
Cheney wrote:
Chinese love junk food! Our plan to render them a helpless mass of bloated walruses is proceeding right on schedule.