Would a trade war hurt McDonald's and KFC?

Anti-U.S. sentiment could hurt American brands eager to expand in Asia, says RB’s The Bottom Line.

The Bottom Line

U.S. restaurant brands have been eager to expand in China in recent years, and for good reason. It’s loaded with people, the economy is growing and the market is simply not as remotely competitive as it is in the saturated States.

Yum Brands-owned KFC has proven this. China is its biggest market. McDonald’s is working to build its presence there. Starbucks has established a beachhead there and is banking on the market for much of its future growth.

The looming trade war between the U.S. and China is probably not going to change that over the long term. But it certainly won’t help.

Sara Senatore, analyst with Bernstein Research, said in a note on Friday that Yum’s same-store sales in China have declined whenever Western brands have come under fire there.

This happened most recently in 2016. That year, an international tribunal ruled against China in a dispute over the South China Sea. That led to anti-U.S. protests and pulled down Yum’s same-store sales.

Earlier, scandals involving supply chains hammered U.S. brands in the country, especially Yum.

It’s easy to forget, in fact, that a 2014 supply chain scandal in China hammered KFC, McDonald’s and other Western brands, too, and not just in China. McDonald’s Japan was hit with same-store sales declines of more than 20% in the aftermath, leading to store closures and a reconfiguration of the brand there.

But McDonald’s Japan has also recovered nicely, and that’s important to remember this time. The declines have been temporary, even if severe, and haven’t been enough to stop the chains’ expansion in China.

In Yum China’s case, for instance, the company was strong enough to be spun off of Yum Brands as a franchisee of the company in 2016.

In March, the Trump administration proposed tariffs on steel and aluminum imports from China, which fired back with tariffs of its own.

This week, the burgeoning trade war escalated, with the U.S. threatening tariffs on $50 billion of Chinese goods, and then China firing back, and then the administration considering more tariffs still.

The result was an extreme amount of volatility on Wall Street that restaurants have largely avoided. McDonald’s, for instance, is up nearly 2% this week, even after a decline on Friday.

Yum, however, which depends far more on China than any other restaurant company, is down slightly. Yum China, meanwhile, is down more than 3%.

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