KFC recovers from DHL disruption, but at a cost
- KFC is mostly back and running after it closed half its stores in the U.K. following a supply disruption, caused by a new third-party logistics partner, in February.
- David Gibbs, CFO of Yum! Brands — which franchises KFC, Pizza Hut, and other chain stores — said the company reached a settlement with the "parties that were responsible," to help minimize cost and "get everybody back to a healthy situation."
- Still, the short-term disruption cost the company. KFC's saw a 2% impact in same-store sales and 5% operating profit impact in the first quarter.
Even a short-term supply disruption can have deep impacts on operating margins, but Yum! Brands appears to have emerged from the lack of chickens with only a scratch.
Yum! operates on a franchise model, so while it is responsible for the brand, system and supply maintenance, daily operations are independently managed. The shortage of chicken in the U.K., meanwhile, appears to have been caused by a delivery switch from Bidvest Logistics to DHL.
KFC, at the time, blamed the shortage on "teething problems" in the transition. DHL apologized for its operational problems, and the old third-party logistics provider, Bidvest, said it thought the transition was smooth on its end, PR Daily reports.
Gibbs' statement that the responsible parties had reached a settlement with Yum! suggests the financial impact may have been greater without the deal. "We can't really go into any details on that, but that is baked into our numbers," Gibbs said.
As a result, the drop in same-store sales and the state of franchisees' operations may be more indicative of KFC's recovery than operating profit figures.
Even then, the effect appears to be marginal. The 2% impact in the first quarter drops to a 0.5% estimated impact on a full-year basis, according to Gibbs. In 2017, the nearly 900 UK restaurants accounted for only 3% of the brand's sales, according to Yum!'s most recent annual report.
A diligent marketing strategy also played a strong role in minimizing the impact of the supply disruption.
"We ran, I thought, a rather clever ad when we were in the middle of the crisis but, obviously, we stopped advertising while we didn't have supply," said Yum! Brands CEO Greg Creed during the earnings call. "So I think we're excited to get all 871 restaurants back and we'll be excited to turn on the marketing machine."
However, the lost sales in those individual stores could drastically affect individual franchisees' operations.
"Should the supply availability issues persist, our franchisees, suppliers and the distributor, whose affiliates also service KFCs located in other countries within Europe, may experience financial distress or require credit support, which could further impact our results of operations," the company wrote in late February.
Today, however, the problems are mostly fixed — albeit with a few stopgap measures. KFC renewed its agreement, in part, with Bidvest Logistics, to help continue operations alongside DHL.
"All 871 restaurants are open for their normal hours," said Creed. "One-third of the restaurants are up and running with the former supplier and the remaining two-thirds of the restaurants are successfully receiving product from the new supplier."
Gibbs added he expects revenue effects from the disruption to persist through the second quarter, "also contributing to the second quarter being the worst quarter of the year, most likely."
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