Yum Brands plots China expansion

08 October 2010

BEIJING: Yum Brands, the owner of Pizza Hut, KFC and Taco Bell, is leveraging several major trends to maintain its "explosive growth" in China.

The company reported that its Chinese profits climbed 23% during the last quarter, while organic revenues increased 6% over the same period.

"Our growth there is really tied to continued growth of the economy," David Novak, Yum's chairman/ceo, said on a conference call with investors.

"Because we have a national presence we feel we're able to take advantage of economic growth pretty much throughout the country."

The US multinational unveiled 245 new outlets in the last three quarters, and anticipates this total should reach 475 across the year as a whole.

"Our China new unit returns remain a key focus for us, and continue to be the best in our business," said Novak.

The 14 eateries Yum is operating at the Shanghai Expo are expected to yield $15m (€10.7m; £9.4m) in revenue, alongside strengthening customer perceptions.

KFC now runs over 3,000 restaurants in mainland China, and is rolling out a breakfast menu that has enjoyed a double-digit expansion rate.

"This sales layer is positioned well, as more Chinese consumers are eating breakfast outside their homes," said Novak.

"While we're certainly viewed as the chicken experts, our menu also includes beef and seafood, as well as other products with broad appeal to Chinese consumers."

Home delivery is available in 1,400 KFC branches, proving particularly popular in higher-tier cities, and around a third of stores are open 24 hours a day.

Pizza Hut, which boasts 500 sites, revamps its local menu twice a year and has similarly introduced a take-away service in a fifth of these locations.

"We are having solid success building a true casual dining concept with everyday, affordable value," said Novak.

Yum has also established a fast food banner specifically for China, East Dawning, and holds a 27% stake in Little Sheep, a leading player within the hotpot category.

Looking ahead, a variety of important shifts could further enhance demand in the out-of-home dining sector, according to Novak.

"As the country grows, we expect it to continue in the areas that have helped us in the past," he said.

"[This includes] people moving from the country into the cities; greater infrastructure, which not only helps our distribution, but also gives us new trade zones in places like railroads, airports, etc.; and continued development in the central and west part of the country."

Rising labour costs constitute a potential "headwind", although the company suggested this may offer some attendant benefits.

"We have to price or get cost efficiencies to cover it, but at the same time we like the fact that people have more money in their pockets and we have more consumers who could buy our products," said Yum's cfo, Rick Carucci.

"We clearly think our brands have the ability to absorb that and any other increases you could or couldn't get in commodities."

Data sourced from Seeking Alpha; additional content by Warc staff