• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

I found it somewhat interesting that the CEOs of YUM and MCD both blamed poor same-store sales trends on the Chinese economy that grew 9% in 3Q09. 

Anecdotal evidence of the behavior of the Chinese consumer is very difficult to come by.  Today, I read an interesting survey on the Chinese consumer and it completely contradicts what the management teams of both YUM and MCD are saying about what is impacting their business.

First, YUM Brands CEO David Novak said on the company’s 3Q09 conference call that “I don't know when the China economy will improve, my guess is that it will strengthen before the rest of the world.”

More to the point, I specifically asked MCD’s management during its 3Q09 earnings call why it felt the need to pull back on China unit growth when GDP grew nearly 9% last quarter.  The answer was so flip I felt like I was dismissed as being uninformed about the Chinese economy. 

Here is MCD’s response to my question...  “GDP in China is very much driven by infrastructure investment.  So you've got to separate GDP from consumer spending.  Two different animals and then, worry is growing around the country.  So the Chinese consumer is a big saver when they're worried about what's going on, and so we've seen that.  We're not going to chase the traffic there from a significant price point of view.  And so, we see the consumer coming back there, so it's not any kind of long-term concern but the GDP numbers that you hear are the level of infrastructure investment that's being put in along with incentives for things like car buying, et cetera, which do not affect the consumer every day on the retail side.  And so, we modeled on the retail data and plan ourselves accordingly.”

MCD went so far as to cut back unit development in China and YUM did not.  I have thought that YUM should do this for six months now, but management suggests that I should not think like a typical US-centric restaurant analyst and I need to view China differently.  Time will tell.

Over the years I have found BIGresearch very helpful in detecting consumer trends here in the US.  BIGresearch just recently published a poll on the Chinese consumer that makes me question what both YUM and MCD are saying about the Chinese consumer.  Although both companies stated that they are seeing signs of improvement in China, both companies are expecting some softness to remain in the near-term as a result of the relatively weak consumer. 

According to the BIGresearch poll “The effects of a global recession continue to be felt around the world, except maybe China, where credit is flowing, and consumer confidence is rising and young Chinese consumers are planning to spend money.”

According to BIGresearch’s 17th China Quarterly, of which there were 12,641 18-34 year olds and 15,168 total respondents, 64.7% of Chinese Consumers 18-34 are confident/very confident in the chances for a strong economy versus 61.3% in Q2 2009, and up almost 40% from Q4 2008.  It would make sense that this sequential improvement in consumer sentiment would be reflected in MCD’s and YUM’s China results, but YUM’s same-store sales growth in China continued to decline in 3Q09 on a 2-year average basis and MCD’s comps are still running negative. 

According to the survey, “The improving trend likely reflects the success of the large stimulus package introduced by the government in early 2009.”  But there is no love for KFC or McDonald’s! 

The survey goes on to say “the young Chinese consumers have a higher propensity to buy a new vehicle or make a big dollar purchase than Americans the same age, which could be due to growing credit markets in China. For example, 24% of Chinese Consumers say they are planning to buy/lease a vehicle in the next six months, up 22.0% quarter-over-quarter, and a whopping 64.7% year-over-year. This compares to 13.4% of 18-34 year old Americans who say the same.  It appears that the young Chinese consumer economic outlook has started to improve.”

As compared to the US consumer, the Chinese confidence in the economy is increasing and their outlook regarding employment is better.  If we saw the same trends in the US, nobody would be making excuses for poor trends.  Instead, we all would be asking what is wrong with the concept.  Right now, both companies are getting a free pass on trends in China.