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Financing

Coronavirus hits China restaurants hard

Yum Brands, Starbucks, McDonald’s and others have had to close stores in a country many see as a major source of growth.
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Photograph: Shutterstock

Much of the restaurant industry views China as a massive, populous and hungry frontier for growth.

But those efforts have taken a temporary hit of late as the coronavirus has quickly spread through the country, beginning in Hubei province, 500 miles west of Shanghai. The virus has led to the closure of thousands of restaurants from major U.S.-based chains, and even executives from companies with a limited presence there are watching the events closely.

Yum China, which operates Yum Brands concepts KFC, Pizza Hut and Taco Bell in the country, said last week that its same-store sales are down 40% to 50% since Chinese New Year late last month.

“The recent coronavirus outbreaks have caused significant interruptions to our business,” Ka Wai Yeung, Yum China’s chief financial officer, said on the company’s fourth quarter earnings call last week, according to a transcript on financial services site Sentieo.

The company started closing restaurants right after Chinese New Year, and more than 30% of locations are currently closed, while other restaurants have been hurt by travel restrictions.

For Yum China, the impact is not insignificant: The company operates 9,200 locations, including more than 6,500 KFC locations. That means the operator has closed about 3,000 restaurants temporarily.

While the financial impact is uncertain, Yum China generated about $1.8 billion in revenue last quarter, which suggests that it has already potentially lost hundreds of millions in sales from the closures.

David Gibbs, CEO of Louisville, Ky.-based Yum, said he has been in “regular contact” with Yum China CEO Joey Wat about the outbreak. “This will certainly be a headwind for 2020,” Gibbs said on the company’s fourth quarter earnings call last week, according to Sentieo. “At the end of the day, this is a business built on people, and the health and safety of those people will always be our top priority.”

Coronavirus’s rapid spread has hit China hard. There were nearly 43,000 confirmed cases as of Wednesday morning, according to the World Health Organization (WHO), including more than 1,000 deaths in China alone.

The country has taken aggressive steps to thwart its spread, including travel restrictions, and restaurant chains have closed their doors while working with local authorities.

Starbucks Corp. said last month that the coronavirus has led to the closure of more than half of its restaurants in the country, suggesting more than 2,000 closures. While China represents 10% of the chain’s revenues, it is a major growth market for the chain and the company expected the closure to have a “material” impact on its results.

“Our brand is very strong in China,” CFO Patrick Grismer said on the company’s earnings call last month. “Our confidence in the profitability and growth potential of this business is undiminished.”

China is also a critical market for McDonald’s, which has closed “several hundred” restaurants there.

“Obviously, the situation in China is fluid, and it’s concerning,” McDonald’s CEO Chris Kempczinski said last month, according to Sentieo.

He said the company has put in place “an epidemic prevention and control task force” along with local authorities.

“China for us is a critical strategic market, but I think it’s probably more because of the potential that we see in that market as opposed to its materiality to the business today,” Kempczinski said.

He noted that China represents about 9% of its global restaurant count but just 4% to 5% of its systemwide sales and 3% of its operating income. “While China is a critical market for us and we’re very concerned about the situation over there, its actual impact on our business is going to be fairly small,” he said.

That’s assuming the situation “stays contained to China,” which is not entirely clear yet. There have been 76 new cases of coronavirus reported outside of China over the past 24 hours, according to WHO, which has said the risk assessment on the global level is “high.”

So far, 395 cases of coronavirus have been confirmed outside of China.

Jose Cil, CEO of Burger King owner Restaurant Brands International, said the company is “monitoring the situation very closely.” He said it’s “too early to say how long the impact” on the company’s business will last.

Yet Burger King has less of a presence in China than the other chains; China accounts for just 2% of the company’s systemwide sales, Cil said.

Similarly, China is not a big market for coffee and donut chain Dunkin’, but CEO Dave Hoffmann is paying close attention, anyway. Hoffmann spent 12 years in Asia, and it “had a big impression on me.”

“We have formed a global task force to closely monitor this issue around the globe and report regular updates on the status of this outbreak,” Hoffmann said last week. “We have all hands on deck monitoring the outbreak.”

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