Yum! CEO: Biggest success story is Pizza Hut China

David Novak, Yum! Brands CEO and chairman, provided the keynote address at today's Bank of America Merrill Lynch Consumer & Retail Conference in New York City.

He covered a range of topics, including the adverse publicity from the recent Chinese poultry supply incident to the success of Taco Bell's new product innovations including Cantina Bell and Doritos Locos tacos.

For the Pizza Hut brand, Novak said its casual dining business in China is the biggest success story Yum! has had in the past three years. There are more than 800 restaurants in the market with average unit volumes of $1.8 million.

"Pizza Hut casual dining is a phenomenal business. We've done this with pizza and more, with tremendous variety and value. And our consumer metrics are at an all-time high," he said.

Pizza Hut China is planning to rollout a "Stone Pan" offering this year, in which steaks are cooked at the table in front of customers. Additionally, its breakfast daypart will be expanded.

"There is a tremendous opportunity to own the midscale breakfast segment. Here, we have IHOP, Perkins, Bob Evans ... In China, there is nobody like that," Novak said. "We began testing American breakfast in China and it's done extremely well."

Breakfast is now available in 100 stores with favorable metrics (93 percent) for repeat customers.

Another future growth driver for Pizza Hut in China is in home delivery.

Other international markets

Novak said Pizza Hut India requires a lot of work, but offers a "huge" opportunity. Casual dining business in that market is solid for Pizza Hut, but there is a hole to fill in delivery/carryout.

"Domino's has done an outstanding job in getting ahead of us, frankly," Novak said. "They've done a great job and we haven't. We need to catch up."

Other international opportunities for the company include Brazil, where both Pizza Hut and KFC will expand aggressively within the next five years. Thailand, Vietnam, Africa, Russia and Indonesia have also provided plenty of opportunities for Yum!

In Europe, France provides Yum! Brand's highest AUVs in the world, and the company is introducing television advertising in Germany for the first time this year. It is also beginning to expand in Spain.

"McDonald's makes well over $1 billion in these countries and we make less than $100 million. If we can get to one-third of the size of McDonald's, we'll have a tremendous upside and we think we can do that," Novak said.

U.S. business

Stateside, Pizza Hut is growing the number of units for the first time in years, mainly through its Delco Lite (smaller) restaurant model. Delco Lite, Novak said, is entering "small town America and doing extremely well." He predicts going from 6,000 stores to 8,000 in the next five to eight years.

The consumer environment

Finally, Novak painted some color on the current consumer environment, calling it tentative.

"People want to have confidence now, but I don't think they necessarily have it; nobody's taken a victory lap," he said.

The competitive environment is particularly heavy in the U.S., where business has been affected by payroll taxes, higher gas prices, weather, etc. during Q1 alone. To maintain an edge, Novak said a company has to have value and innovation.

"The U.S. is the most competitive market we have anywhere in the world and if you don't play your 'A' game, you're going to end up losing," he said.

Novak also admitted when Domino's does an aggressive promotion, Pizza Hut feels that pressure immediately and has to respond quickly.

"You have to make sure your price-value equation is right and competitive. And this consumer environment is still very, very tough," Novak added. "You have to have value and innovation."

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