China food probe slams KFC's parent

For the last few years, Yum Brands (YUM), the parent of Kentucky Fried Chicken, Taco Bell and Pizza Hut, could do wrong in Wall Street's eyes.

It was betting its future on China, where the near-term growth prospects were limitless, especially with KFC.

Wall Street's love for Yum, however, has faded -- at least for now -- in a big way because China has turned into a problem.

In December, the company said two poultry suppliers had injected their chicken with "unapproved levels of antibiotics." The suppliers represented only "an extremely small percentage of product to KFC," a Yum statement said.

The percentage may be small, but the problem has escalated dramatically. Late Monday, the company said that its China same-store sales would be down 6% in the fourth quarter. It had earlier thought the antibiotic problem might cut same-store sales by 4%.

So, the shares were down $2.88 to $65.01 Tuesday afternoon, among the five worst-performers in the Standard & Poor's 500 Index ($INX). They had fallen to as low as $64.40 and are down some 12.6% from their all-time closing high of $74.47 on Nov. 29. Volume on Tuesday was more than twice its daily average of 4.2 million shares. The problem for Yum is not just the embarrassment of having to deal with the Chinese government's interest in the antibiotic problem. And that task is not easy, by all accounts.

The problem is that so much of the company's fortunes depend on China.

Yum generated $1.99 billion in revenue in China in the third quarter -- about half of the company's total of $3.57 billion. Half of its operating profit came from China as well.

KFC owns most of its Chinese outlets outright, unlike in the United States where most KFCs are franchised outlets. Yum's U.S. revenue in the third quarter was $769 million.

Yum has a much larger presence in China than rival McDonald's (MCD) -- 5,400 stores to 1,600.

Despite Yum's woes, China's huge population and growing middle class will remain a big magnet for U.S. companies.

Starbucks (SBUX) opened its 100th store in China in November and expects to have 1,500 stores in 70 cities by 2015. McDonald's, Wendy's (WEN) and Burger King (BKW) are expanding as well. McDonald's, Starbucks and Wendy's were lower Tuesday.

More on Money Now

• Is a global sushi craze emptying the oceans?
• Can Eddie Lampert save Sears?
• Allstate tries to fix a public relations blunder