Shares of Yum Brands (YUM) dropped sharply Friday after the company warned that same-store sales at its restaurants in China would fall in the fourth quarter.
Yum has expanded aggressively in China, which may not be a bad decision in the long term. The company is rapidly transitioning from an agrarian society to a more developed one. China's middle-class is the fastest growing in the world, making it a great place for fast food chains to expand. Unfortunately for Yum, giant economies don't undergo dramatic changes particularly smoothly, particularly when the economy in the rest of the world is struggling.
Yum may have made the mistake of expanding too fast in China, but with some patience, that investment will pay off for the company in the long run. China is home to more of Yum's restaurants than any other country, which means the company is going to buffeted by the ups and downs of China's economy for a while.
The good news for Yum is that once a nation starts to industrialize and develop a middle class, that process almost never reverses. China may move toward a consumer culture in fits and starts, but it is inevitable that it will eventually become a fully industrialized economy with the world's largest middle class. Yum's early start in the country will look brilliant once that happens.
Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at firstname.lastname@example.org.