WATCH: KFC, Nike, other top US brands sweat over next step in trade war | Fin24
 
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WATCH: KFC, Nike, other top US brands sweat over next step in trade war

Aug 20 2018 17:13
Matt Townsend, Bloomberg; Video, Reuters

America’s corporate bosses could be excused if they don’t agree with President Donald Trump’s boasts that a trade war is “easy to win”. They can just reflect on the levers of pain China pulled against South Korean-owned businesses last year to imagine a state-nudged boycott against Starbucks or shutdown of Nike’s factories.

China vows to retaliate against all US tariffs but hasn’t announced a response to Trump’s proposal to put duties on another $200bn in Chinese imports next month. Since that’s more than the value of all US exports to China, the Asian nation will need more than tit-for-tat tariffs to punch back.

If China employs a similar strategy to the one used when its neighbour installed a missile defense system - shuttering stores and factories owned by South Korean companies and stoking boycotts - a slew of US brands could pay dearly. That’s because China is both an essential supplier and also the biggest growth market for many US companies.

Here’s a rundown of some of the brands with a lot to lose:

Nike

Just last year, China showed that it wasn’t afraid to poke Nike when a program on state-run television criticised it for false advertising. That’s troubling for the world’s largest sports brand because consistent growth in China stabilised Nike Inc when it struggled to fend off competition in the US. Revenue in China surged 21% in the past year to $5.13bn, growing to 14% of Nike’s total sales. Meanwhile, revenue in North America declined about 2%. And China is a major supplier, too, producing about one-fifth of its goods.

Starbucks

The coffee chain counts the US and China as its two key markets. Last year, China was “a standout”, posting 7% same-store sales growth, Chief Executive Officer Kevin Johnson said. Starbucks Corp expects strength to continue with an accelerated expansion plan that will add 600 stores a year to hit 6 000 by 2022. But there are already signs of weakness in the country, with sales at existing stores declining 2% last quarter.

Starbucks is also more exposed than other US restaurant chains because it owns most of its stores in the country, rather than selling franchise rights. But that may also shield it from a backlash because it’s seen as a good employer and founder Howard Schultz travels to the region often for public events.

McDonald’s

The world’s largest restaurant chain has been in China for almost three decades and now has about 2 600 locations there. The company did reduce its exposure to the country last year, selling its China division for $1.7bn to an investor group that includes state-backed entities.

But McDonald’s Corp did maintain a 20% stake, which means it’s still a valuable source of revenue growth. The new owners plan to almost double the number of locations in the next five years. But that will come amid a recent slowdown in the business, with customer visits declining over the past several months.

Coca-Cola

While China is one of the beverage company’s biggest markets, Coca-Cola Co did recently reduce exposure there by divesting its bottling operations. It doesn’t break out sales from the country but has consistently called China one of its best growth markets. For many years, the company’s Sprite brand was tops in China.

Mattel

The toymaker is looking to China to help revive growth, including entering a partnership with e-commerce giant Alibaba Group Holding last year. It also recently reached a deal to open learning centres in the country with a local partner that will integrate its brands, including Fisher-Price, into the curriculum. Mattel Inc, which also makes the Barbie and American Girl properties, last year said its China business could quadruple by 2020.

KFC

Yum China Holdings, the operator of KFC and Pizza Hut restaurants in China, was the target of anti-US protests just two years ago, and it’s easy to see why. The spinoff of Yum! Brands Inc runs the country’s biggest network of fast-food restaurants, with 8 200 outlets.

Any pressure from the government would add more difficulties for Yum China. Pizza Hut has been struggling and KFC unexpectedly saw flat same-store sales last quarter as younger diners turn to domestic chains and healthier options. A consortium that includes KKR & Co, Hillhouse Capital and Chinese sovereign fund China Investment Corp are said to back a potential takeover of Yum China.

Michael Kors

While many US brands have been reducing risk in China, Michael Kors Holdings in 2016 acquired direct control of its business there from a licensee. The division included more than 100 stores and about $200m in revenue. The move was seen as a way to offset slowing sales in other regions. The luxury purveyor also makes a lot of its goods in China, with one manufacturing partner accounting for 20% of its products.

Burger King

The chain’s owner, Restaurant Brands International, has big plans for China. CEO Daniel Schwartz recently said the country will be the focus of its global expansion plans. The company is also taking its Tim Hortons brand to China with plans to open more than 1 500 locations there. “We’re excited about China,” Schwartz said on a recent call with analysts.

Steve Madden

The shoe and handbag brand sources more than 90% of its goods from China, meaning any kind of serious disruption to its supply chain would have a huge impact. And while China is a small market at this point for Steven Madden - it generates 90% of its revenue in the US - the region is a source of growth.

“Long term, we remain very optimistic about the opportunity there,” Steve Madden CEO Edward Rosenfeld said last month on a call with analysts. “We’re going to ramp up marketing.”

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