KFC is telling a distressing story about the Chinese economy

KFC China(AP Photo/Mark Avery)A Beijing policeman directs traffic in front of China’s second Kentucky Fried Chicken restaurant, shown Jan. 9, 1989.

KFC and Pizza Hut might not seem like good global economic indicators, but they’re flashing a warning sign about the state of the Chinese economy right now.

Yum! Brands, the US food giant that’s made an enormous push into China, came out with some grim results late on Tuesday. The stock plunged 19% in after-hours trading.

The company owns KFC, Taco Bell and Pizza Hut, and as Business Insider’s Akin Oyedele notes, more than half of its business is done in China.

So it’s not good news for the company or the country that KFC sales rose by only 3% year-on-year.

Pizza Hut’s performance is even more worrying, with a 1% fall. By Chinese standards, those are pretty dreadful growth figures.

In recent years, with consumer spending struggling in the world’s advanced economies, reliance on China has been a good bet. Yum’s share price rose by 120% between May 2010 and May 2015, for example:

But China is now making a difficult transition away from the investment binge of the post-2008 period, towards a services-led consumer economy, is often called the “middle-income trap.” It’s a leap not all of them manage to make.

For that, Chinese manufacturing will probably grow at a far less spectacular pace, and it will build less too. Part of the recent slump in commodity prices has been down to falling Chinese demand — the world simply won’t need as much cement, for example, if the country’s astonishing city-building programmes aren’t so necessary anymore.

The company is not some tiny presence in China either — it now has 4,889 KFC outlets and 1,705 Pizza Hut units. That flaccid growth isn’t just a statistical blip.

Here’s what Greg Creed, Yum’s CEO had to say:

The pace of recovery in our China Division is below our expectations. Outside of China, our Taco Bell and KFC Divisions continued to sustain their positive sales momentum while Pizza Hut was relatively flat. Given our lower full-year expectations in China, combined with additional foreign exchange impact, we now expect 2015 EPS growth to be well below our target of at least 10%.

Similarly, Bank of America Merrill Lynch research analysts Joseph Buckley and Gregory Francfort say they were expecting double-digit sales increases from Yum China.

The results are the polar opposite of those seen by Nike, with footwear sales up by an impressive 36%. Strong sales of things like footwear and fried chicken are exactly what China wants to see right now.

It’s worth noting that in China companies like KFC and Pizza Hut don’t have the same downmarket reputation that they do in the US or Europe. Being able to eat at them is a pretty middle-class spending choice.

The way China’s growing middle class chooses to spend (or not) is going to make or break those rebalancing efforts, and that matters for the whole world given the way the country has propped up global growth since the 2008 financial crisis. If China won’t eat KFC, the world has a problem.

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