What a Buyer of Yum Brands' China Spinoff Is Coming Up Against

(Bloomberg) -- China’s fast-food industry is in focus with the country’s sovereign wealth fund, China Investment Corp., and other investors said to be backing a takeover of Yum China Holdings Inc. The interest comes as the operator of the KFC and Pizza Hut brands in the country and other U.S. brands are reporting slowdowns. Here are some caveats for whoever bids for Yum China, valued at $13.6 billion.

Consumer Slowdown

  • Chinese consumer spending is softening. Retail sales in July posted annualized growth of 8.8 percent that missed analysts’ estimates and stood close to a 15-year-low
  • KFC, the big draw for Yum, unexpectedly saw same-store sales growth go flat last quarter while Pizza Hut sales fell 4 percent; CEO Joey Wat said there was “some softness in consumer spending” as competitors focused on promotions
  • Starbucks also reported same-store sales dropped 2 percent in the most recent quarter, while McDonald’s CEO Stephen Easterbrook said in July that guest count growth was negative for China through the quarter
What a Buyer of Yum Brands' China Spinoff Is Coming Up Against

Evolving Palates

  • Millennials looking for healthier options and local fare are turning to Chinese chains that bring entertainment and tech innovations to dining
  • Diners at Haidilao, which operates more than 270 restaurants specializing in spicy Sichuan hotpot dishes, can get their nails done or shoulders massaged while waiting for tables
  • At Alibaba-backed Hema Supermarkets, shoppers pick out lobster, crab and other fresh seafood that’s cooked on-site as well as pay for goods with mobile app Alipay
  • Pizza Hut, which accounts for about 20 percent of Yum China’s operating profit, “is struggling to resonate with the rapidly changing tastes of the Chinese consumer,” Bloomberg Intelligence analyst Jennifer Bartashus wrote in a July report