According to the Xinhua news agency, KFC employees in northeast China will see minimum wages rise to 900 Yuan ($132) a month, from 700 Yuan, after the company agreed to demands from the local trade union; employees of YUM operations in the Shenyang, Liaoning province, will also receive an annual pay rise of 5%. Yum! Brands in Shenyang manage 57 KFC outlets and 11 Pizza Hut restaurants. The returns for YUM China are so strong due in part to very low labor costs. Recent wage hikes, combined with rising prices, mean the China return dynamics are changing.
China generates 37% of 2010 estimated segment operating income. Prior to Q1, trends had been steadily declining, but the YUM management team pointed to improving consumer confidence as part of the reason for the return to better trends.
Year-to-date, the Chinese market is down 21% and it appears to be taking a toll on consumer confidence. In April, Chinese consumer confidence declined to 106.6 from 107.9 (though still up YOY). Management highlighted on its 1Q10 earnings call that consumer confidence in China had increased year-over-year the last three months. The absolute direction of consumer confidence, however, will take its toll on trends on a sequential basis.
For YUM to maintain its same-store sales momentum on a 2-year average basis from Q1, YUM China needs to post a 10% same-store sales number in the second quarter. In this environment, a sequential slowdown in 2-year average sales trends is the more likely outcome. The company guided to a similar magnitude of same-store sales growth in China in 2Q10 as reported in 1Q10, which would imply a 300 bp decline in 2-year average trends.