America’s largest food and beverage companies, from Coca-Cola to McDonald’s and KFC, are heavily invested in the Chinese market. So how did Monday’s China-induced stock swoon affect them?
China’s underlying economic problems, as well as the recent devaluation of the Yuan, had already been priced into the stocks of most of the food, beverage, and restaurant companies with heavy exposure in that country. But reviewing what happened to those shares amid Monday’s China-driven U.S. market swoon shows that whatever might happen in China’s stock market, it’s the Chinese economy that will determine the fate of America’s giants doing business there.
The Dow recovered most of its losses after diving more than 1,000 points on Monday, a reaction to an 8.5% percent drop in China’s main stock index. American markets recovered as investors teased out which stocks were most at risk from the troubles afflicting China’s equities market. In general, American food companies with a lot of exposure in China fared somewhat worse in early trading than the market as a whole, but losses were minimal on the day, suggesting that investors realized fairly quickly that the longer-term trends still look favorable in general for food companies doing business in China.
Yum Brands now collects more than half of its revenue in China, where it has been building KFC and Pizza Hut outlets like crazy. The company boasts that it is China’s “leading retail developer” and that KFC is the “No. 1 foreign brand” there, with 4,800 stores in 1,000 cities. Including Pizza Hut, it operates 6,800 outlets in China, with plans to open “at least” 700 more this year alone.
During the market’s opening drop, when the S&P 500 fell by just under 10%, Yum shares lost about 16% of their value before recovering to close down by about 3.2%, pretty much in line with the market. The S&P 500 fell by 3.94% on the day.
Shares in Mead-Johnson Nutrition fell only about 7% in this morning’s freefall. In July, the maker of baby formula cut its sales forecast, citing China’s slowing economy as a major reason. Mead-Johnson gets nearly a third of its revenues from the Chinese market, vs. the 24% it collects from the U.S. market. The slowdown in China’s consumer economy forced Mead-Johnson to cut its sales-growth forecast from 7% to 2%, and warned that profit growth would slow as well. In a statement at the time, CEO Kasper Jakobsen said that the company’s just-introduced line of fully important products “contributed strongly to sales, even as we failed to entirely offset the slowdown in locally manufactured product.” Of course, that was before China devalued the Yuan, making imports more expensive.
On Monday, shares recovered and closed down just 1.6%.
Almost on the eve of China’s stock market swoon, Coca-Cola Chairman and CEO Muhtar Kent spoke at a groundbreaking ceremony for the company’s newest production site in Xianghe, Langfang. The plant is part of Coke’s plans to spend about $4 billion over the next three years in China, where it has already invested about $9 billion over the years. Coke was one of the first Western companies to invest big in China, where it started operations in 1979. It runs about 45 plants there, selling 10 different beverage lines.
Coke shares lost 9.5% of their value in early trading Monday, and didn’t recover quite as well as some others. Shares lost 3.75% of their value on the day.
The beleageured McDonald’s generally owns and operates its own stores in growing foreign markets, and that’s generally the case with its Chinese operations, with only about one-fifth of Chinese outlets owned by franchisees. The company now plans to sell more stores there to franchisees. And though its same-store sales fell by nearly 5% in the first quarter, there is no sign of a slowdown in McDonald’s plans to expand in China, where it has had a presence for more than two decades. In line with the company’s global cost-cutting efforts, McDonald’s has shuttered some underperforming stores in China and in other Asian markets.
Just a couple of weeks ago, Mondelez International, the United States’ largest food company and the world’s second-largest, announced a restructuring of its Chinese operations aimed at cutting costs and spurring sales growth. Sales of the snacks and food sundries the company sells in China are closely tied to the weakening consumer economy.
Mondelez shares lost a little over 2% of their value on Monday, after falling nearly 10% in early trading.
The bottom line
For all of these companies, China is a long-term play, not dependent on day-to-day movements of the stock market. And while there might be years of softness ahead for that country’s economy, the long-term trend is nevertheless ever-upward: China consumer market will continue to grow. Investors in the U.S. seemed to realize this on Monday after the initial panic. As Geoffrey Smith noted today, it is “the Chinese economy, rather than the Chinese stock market, that matter most to global investors.”