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KFC And Pizza Hut Expect Sales Slump In China

(c) Sky News 2012

The company which owns Pizza Hut and Kentucky Fried Chicken has warned of an unexpected slump in sales in its biggest market.

Yum Brands Inc (NYSE: YUM - news) has projected that sales in its Chinese branches which have been open for at least a year will drop 4% in the fourth quarter of this year compared with a jump of 21% in the same quarter last year.

Nearly half of Yum's worldwide revenue is generated in its China operation. There are 3,701 branches of KFC across China and 764 Pizza Hut restaurants.

"For the fourth quarter, stronger than expected operating performance from Yum! Restaurants International and our US division is offsetting softer sales in China, where we now expect same-store sales to be negative as we overlap 21% same-store sales growth from last year," Yum chief executive David Novak said in a statement.

The reasons for the "softer sales" in China are likely to be numerous.

Broadly, China's economy has slowed in the past few years. The country's gross domestic product (GDP) in the third quarter of this year was the slowest for more than four years.

However, Yum's increased exposure in China is thought to be about more than just economics.

When the company arrived in China in the late 1980s, it entered an empty market. It offered something new and to a consumer that was increasingly keen on Western products.

It tweaked menus to provide a more oriental offering - and the investment in China quickly made it one of the most successful Western companies to operate in the world's second largest economy.

But today, fast food outlets are everywhere in China's cities.

Some are Western but most are Chinese or from elsewhere in Asia. They offer local food but also pizza and fried chicken - and for a fraction of the price.

McDonald's is also experiencing a Chinese downturn. It announced last month that sales were down in October.

Yum Brand's hiccup will be watched closely by other Western companies who have made the plunge into China or those who are thinking of doing so.

With one fifth of the world's population living in China, Western companies often find that it quickly becomes their most lucrative market.

That's good news while their product is popular with the Chinese, but it is a lot of eggs to put in a single basket that could be becoming a little fragile.