Yum is flogging its once high-flying China wing

CHINA has long welcomed purveyors of cheap chicken. According to local lore, in 1153, during the Jin dynasty, Ma Yu Ching’s Bucket Chicken House opened for business (presumably under a different name) in Kaifeng, a city in the central province of Henan. An incarnation survives today. In 1987 Yum, a big American restaurant company, opened a KFC chicken restaurant near Tiananmen Square in Beijing, becoming the first big Western restaurant chain in the country.

KFC rose so fast that it claims to be the leading fast-food outlet in China. More than 5,000 outlets are spread across hundreds of cities, with Yum opening two new restaurants on the mainland every day in recent years. In 2011 Yum’s China division, which includes a smaller chain of Pizza Hut eateries, earned $5.6 billion in revenues, more than two-fifths of the firm’s global total. Operating profits from China topped $900m that year.

Alas, Yum’s buckets are no longer overflowing with yuan. By last year operating profits in China were down to $757m. The company has been hit by recent food-safety scandals, which revealed that its local management lacked a good grip on its supply chain. It has also been hurt by a trend towards local and, perhaps, healthier fare. A recent survey of 10,000 consumers in 44 Chinese cities by McKinsey, a consultancy, found that 67% of respondents were eating Western fast food in 2012, but only 51% did so last year.

Keen to separate the firm’s volatile Chinese business from the mother ship, and to give local managers a freer hand, Yum said last October that it would float Yum China this year. It now hopes to sell perhaps a fifth of the division to a strategic investor (it is rumoured to be talking to KKR, an American private-equity firm) before listing it on an American stock exchange.

The shares might sell well, but an extended boom is unlikely. Jeffrey Towson of Peking University argues that the firm faces an “operational marathon” against aggressive, cost-conscious and inventive local competitors. Restaurants have been around in China for aeons, he observes, but no chain has managed to gain even a 2% market share. A local outfit, perhaps Ma Yu Ching, could yet have the last laugh.