Fast food chains sweat as apps lure customers

As China's economy stutters, growing numbers of diners on a budget are tapping into smartphone applications to snap up meal delivery deals, spelling big trouble for fast food chains like Yum Brands Inc's KFC and Pizza Hut.

People like Li Jiali, a 20-year-old Shanghai student, say they have all the dining options they need nestling in their phones, without needing to venture out of the house. Yum's shares dived this week after it said it is way behind target in a bid to recover from damaging food scandals in China, its top driver for profit and revenue.

Li's Huawei smartphone is packed with cut-price food delivery apps from some of China's biggest Internet firms, like Baidu Inc's Waimai, Alibaba-linked Meituan and Tencent-backed Ele.me, meaning "Hungry?". These allow thousands of mom-and-pop restaurants to lure diners previously beyond their marketing reach.

"On my phone I have Meituan, Baidu and Ele.me, and I use whichever one has the biggest discount," Li said. Baidu's platform is currently offering the best deals at around 40 percent off, she said, evidence of a price war raging online.

Yum this week pointed the finger at a "savage battle" under way between apps to explain why China same-store sales grew only 2 percent in the third quarter, well below the expected 9.6 percent jump. Yum cut its global forecasts on weakness in China, where the firm has been whipsawed by food safety scandals and marketing missteps over the last few years.

The rise of online apps is an extra blow to Yum, already facing a crowded fast food market, where consultants Euromonitor forecast growth will slow to around 4 percent by 2019, less than a third of the pace a decade before.

Yum's chief financial officer Pat Grismer said on an earnings call after the results: "We are experiencing what we believe is a short-term but significant impact of online ordering aggregators entering the casual dining space."

The company's executives also cited a dud marketing campaign at its Pizza Hut brand and slowing growth in the world's second-biggest economy hitting consumers' willingness to fork out on discretionary spending. Shares sank nearly 20 percent after the earnings report.

Yum's stumble also undermined bullish predictions earlier in the year, when the firm pegged global growth targets to a then-hoped-for sharp second-half China bounce, posing a problem for newly installed China boss Micky Pant.

Stone Shi, Shanghai-based founder and chief executive of restaurant search platform Bon App, said: "Apps like this level the playing field so that every venue has its virtual spot that's equal. It used to be about being a household name in one sector－pizza, pasta, fast food, etc. Now people want to see what else is out there."

Yum did not respond to specific queries after the earnings disclosure on how the firm would combat the rise of online platforms in China.

The firm, which has 6,867 restaurants in the country, also faces the challenge of reviving growth when consumers are redirecting spending from food to other areas such as healthcare and transport, analysts said.