Although the preliminary guidance for fiscal 2011 earnings growth puts Yum's 2011 guidance at a baseline of $2.73 a share, after the company on Tuesday raised guidance for the current year to $2.48 a share, Yum expects $15 million of higher labor costs in the fourth quarter in China and $40 million for the full year. Yum has seen year-to-date China commodity deflation of $35 million but is now expecting a commodity inflation of about $15 million in the fourth quarter.
The rising stiff competition from other quick-service restaurant operators, cost escalation as well as wage inflation in China, and macroeconomic factors influencing consumer spending patterns have emerged as the most immediate concerns for Yum in its China business. Yum is now trying to offset some of the higher costs by raising prices, a prospect that may be more palatable to Chinese consumers with higher wages but that would mean ignoring the majority of China's vast population base that have been contributing to almost one-third of the company's profits.
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