Business News

Yum Plans to Be the McDonald’s of China

Alan Rappeport in New York

Yum! Brands, the operator of KFC, Pizza Hut and Taco Bell, plans to become the McDonald’s of China, blanketing the country’s second and third-tier cities with its fast-food restaurants over the next decade, according to its chief executive.

Customers line up to buy Kentucky Fried Chicken in Beijing.
Teh Eng Koon | AFP | Getty Images

David Novak, Yum’s chief executive, said on Wednesday that Yum plans to more than double its China restaurants to by 2020, when it hopes to have 9,000 across the country. Meanwhile, the company is paring back its ownership of restaurants in developed markets as it accelerates its emerging markets push.

“You see, in small-town America, McDonald’s will have a prime location in all the spots,” Mr Novak said at the company’s investor conference. “What you’re going to see 10 years from now is that we’re going to own that. We’re going to have the very best locations.”

Yum, which is set to earn about $900 million in net income from its China business this year, said it plans to build small restaurants in Chinese rail stations and airports and use its distribution network to expand into second and third tier cities, which tend to be most profitable because labour and rent remain relatively cheap.

Already the leading international restaurant company in China, Yum is adapting its strategy there as the cost of doing business rises. Mr Novak said that Yum expects to face 6 per cent inflation for commodity prices in China and believes the cost of labour will rise in the “mid-teens”, potentially narrowing its profit margins next year.

Although China remains Yum’s most successful market, the company is trying to replicate that success in India and other parts of Asia with more innovative localised offerings, extended hours and breakfast. Mickey Pant, chief executive of Yum Restaurants International, said the company has been leaving billions of dollars of market share on the table for McDonald’s by allowing KFC to lag behind in the breakfast business.

“We will have breakfast in place,” Mr Pant said, noting that customers think of KFC as a place for chicken rather than eggs. “As smart as we think we are, we forgot basic things like telling people we are open for breakfast.”

Emerging markets account for 58 per cent of Yum’s operating profits and the company is ramping up its ownership of restaurants in those countries while “refranchising” stores in developed markets.

Yum, which recently sold off all of its UK Pizza Hut restaurants to franchisees, said that by 2014 it expects to own 70 per cent of its restaurants in emerging markets and just 30 per cent in developed markets. Currently, it owns 53 per cent of its emerging market restaurants and 47 per cent in developed markets.

The Kentucky-based company has seen its US operations struggle. Executives called the performance this year “disappointing” and “terrible”, noting the weak economy and bad publicity, but told investors that a renewed sense of urgency and better relationships with franchises would help.

“It’s been a big challenge in the US,” Mr Novak said. “We still have a lot of wood to chop.”