IT MAY SOUND ASTONISHING that a fast-food chain
selling fried chicken could conquer a country with a
diverse culinary culture rooted in thousands of years
of tradition, but the Chinese division of Yum! Brands
did just that. Yum! Brands was created in 1997 as a
result of PepsiCo spinning off its fast-food operations
worldwide, a group that included KFC, Pizza Hut, and
Taco Bell. Not only did Yum! China become the biggest
restaurant chain in the country, accounting for 4
out of 10 fast-food restaurants; it also now provides
half of Yum!’s total revenue and 42 percent of its profits
( Exhibit MC15.1 ). No wonder David Novak, CEO
of Yum! Brands, considers China to be “the best restaurant
growth opportunity of the 21st century.” 1
When Yum! Brands (then a subsidiary of PepsiCo)
opened its first KFC restaurant in Beijing in 1987,
there was no other Western-style fast-food chain in
China. Being greeted by smiling staff and then dining
in an air-conditioned, clean, and brightly lit environment
was a novelty to local Chinese, as was a bite of
KFC’s crispy chicken. Compared to other American
fast foods, KFC also has a natural advantage: Chicken
is the second most common meat staple in China, just
after pork. Based on an understanding and appreciation
of the Chinese taste for tradition and variety, KFC
introduced dishes that mimicked local cuisines, such
as Chinese porridge and dough fritters for breakfast.
Its menu in China included more items than on menus
in the U.S., and was updated more frequently. In addition,
the level of spiciness of the food was adjusted
according to regional preferences within China. As
a result, a KFC restaurant in China has a much bigger
kitchen and employs twice as many people as its
U.S. counterpart (although Chinese labor costs are
much lower, see Exhibit MC15.2 ). Given all its efforts
in pleasing Chinese diners, KFC no longer positions
itself in China as a cheap place for take-outs. Instead,
it is seen as a more upscale quick-service restaurant
for gatherings of family and friends.
KFC’s sister chain, Pizza Hut, also underwent a
similar makeover in China. Unlike its image in the
West as a cheap, fast-food outlet, Pizza Hut in China
has presented itself as a trendy casual dining restaurant
since its opening in 1990. Diners at a Pizza Hut
restaurant in China are waited on while soothing background
music plays, and the menu offers many other
Western-style dishes than just pizza.
Yum! China’s localization strategy was made
possible because Pepsi was busy competing with
Coca-Cola in the United States and took a hands-off
approach toward managing its overseas restaurant
business. When Yum! Brands was spun off from its
parent in 1997, Yum! China had already opened 200
restaurants in major cities. But Yum! China’s growth
strategy is about more than simply adding restaurants.
From the very beginning, the company has focused on
“building a perfect system which governs every step
of the way—from purchasing, to making, to delivering
the food and to the quick service.” 2
Because a reliable
network of distributors in China was nonexistent
at the time, Yum! China set up its own distribution arm
with company-owned warehouses and a fleet of trucks
to cover every province in China. To make sure each
new restaurant is properly staffed and offers excellent
customer service, Yum! China runs an extensive
training program where teams of new employees work
side by side with experienced ones in established restaurants.
Once trained, these new employees rotate to
new restaurants.
The emphasis in the early years on building an
efficient operations network nationwide laid a solid
foundation for Yum! China’s rapid expansion. From
1997 to 2012, Yum! China opened more than 4,000
KFC and 800 Pizza Hut restaurants in 850 Chinese
cities. Most of the time, Yum! China was the first fastfood
chain (let alone international chain) to establish
a presence in a city. This enabled Yum! to gain a
first-mover advantage by selecting the best locations
with strong customer traffic, high visibility, and an
attractive rental rate. Sometimes, being the first also
generated free publicity from local officials since the
opening of a world-famous fast-food restaurant meant
that their city was becoming more cosmopolitan. Also,
benefiting from China’s lower labor costs, Yum! China
has become the only division within Yum! Brands to
consistently deliver double-digit sales growth and the
highest restaurant margin (see Exhibit MC15.2 ).
With thousands of stores and a vast distribution network
in densely populated areas, Yum! China is vulnerable
to many external and internal threats, such as
outbreaks of bird flu (a repeat occurrence in China) and
food safety scandals. In 2003, the avian flu outbreak
caused a 40 percent decline in Yum! China’s sales. Two
years later, the discovery of a questionable ingredient
used in the chicken feeds by one of Yum! China’s suppliers
brought sales growth down to “only” 11 percent.
Although Yum! China recovered quickly from these setbacks,
last December Yum! China was again attacked
by China’s national news service for sourcing from
suppliers that use excessive antibiotics in their chicken
feeds. Worse yet, just as Yum! China was rebuilding its
bond of trust with Chinese customers, another potential
outbreak of avian flu scared more eaters away. Yum!
China’s same-store sales dropped by 20 percent for the
first quarter of 2013, its first quarterly decline in three
years ( Exhibit MC15.3 ). But with only two Yum! restaurants
per million people in China currently (compared
to 58 in the U.S.), Yum! China has no intention of
modifying its growth strategy or losing its number-one
spot in China’s fast-food industry any time soon.