Yum! expects China recovery to take 6 to 9 months

April 24, 2013 | by Alicia Kelso
Yum! expects China recovery to take 6 to 9 months

By now, most in the restaurant industry are aware of the hit Yum! Brands took when there were issues with the chicken supply chain in China. Because China is such a large portfolio for Yum, particularly for its KFC brand, the company limped along through Q4 after news broke about the crisis.

Those issues were compounded in Q1 2013 thanks in large part to the avian influenza outbreak in that country. Much of the chicken supply in populated areas has been destroyed because of the scare, and consumer confidence about the product is low — low enough to generate a 20 percent decline in China's same-store sales during Q1.

The company overviewed its results in an earnings call Wednesday morning. Even a 1 percent growth at Yum! Restaurant International, and a 2 percent growth in its U.S. business couldn't offset the Chinese chicken issue.

"The first quarter was extremely difficult for Yum! Brands. While we're certainly not happy with our overall results, as we look at how our China sales evolved through March, we were making progress and it was pretty close to where we thought we'd be. Unfortunately, our quest for a full sales recovery has been dampened by the intense publicity of avian flu in China, beginning in early April.

In response, Yum! has launched "Operation Thunder," a campaign created to enhance the KFC brand and its supply chain practices in an attempt to lift consumer perception. As part of the initiative, Yum! is:

  • Working with suppliers to eliminate more than 1,000 small and less modern chicken houses where risk could be the highest;
  • Launching an aggressive quality assurance program, including TV commercials to build as much awareness about quality assurance processes as possible; and
  • Continuing to build the KFC brand with "major news around value and innovation," according to Novak.
  • Novak also said the company is working hard to "beef up" its social media monitoring system to negate false rumors. The company's goal is to be best-in-class on social media sites in all markets.

    "These are certainly trying times for our KFC China business, but I want to be crystal clear that we do expect a complete sales recovery," he said.

    In addition to new quality assurance policies and a marketing barrage, Yum! anticipates recovery to come from new unit development. In China, it's on pace to open at least 700 new units, out-developing the competition by a "wide margin," and having first-mover advantage with entry into more than 100 new cities.

    The company weathered an avian flu crisis in China before, in 2005. With that experience in mind, CFO Pat Grismer estimates a 6- to 9-month recovery period, with same-store sales in China turning positive in the fourth quarter of this year.

    It wasn't all bad news in China for Yum! Pizza Hut China's casual dining business continues to expand in lower tier cities and the brand is beginning to expand its breakfast platform. Yum! is also growing the home delivery service with the Pizza Hut brand.

    U.S. business

    Yum! Brands' U.S. business will also be a net new unit developer for the second consecutive year. Taco Bell plans to grow through new, small units and through a franchisee incentive to bring the brand into rural markets. The brand, which brings in about 60 percent of the company's domestic profits, also continues to benefit from its Doritos Locos and Cantina Bell offerings.

    "In the past year, I don't think anyone has done a better job of innovation than Taco Bell. Taco Bell grew same-store sales by 6 percent in the quarter, and that's on top of 6 percent growth in the first quarter last year," said Richard Carucci, president.

    The company predicts it will sell about 100 million Doritos Locos Tacos in Q2. Like the original nacho cheese offerings introduced in 2012, the Cool Ranch version is currently making up about 11 to 12 percent of Taco Bell's menu mix. The original version dipped to about 4 percent by the end of 2012 after cutting back some promotions, but Novak said anything over 3 percent at the brand is big.

    Additionally in the U.S., Pizza Hut and KFC Q1 sales fell short of expectations. Carucci said the brands' competitors simply "did a better job of providing compelling value and innovation," which are necessary in a soft economy. Executives expect different results in Q2, after KFC's boneless chicken launch and Pizza Hut's Crazy Cheese Crust launch earlier this month.

    Yum! Restaurants International

    Outside of the U.S. and China business, Yum! Restaurants International plans to open more than 950 new restaurants this year. During Q1, YRI added 147 new units, 90 percent of which were opened by franchisees and 70 percent of which are located in emerging markets.

    "Yum! currently has around 2 restaurants per million people in the world's 10 largest emerging markets. Assuming we maintain our current pace of development, we'd have only about 4 restaurants per million people in these markets by the year 2020. That compares to 58 restaurants per million in the U.S. today," Carucci said.

    Company-owned restaurants have also expanded, particularly in Russia, South Africa and Turkey. Three years ago, there were no company-owned units in those countries and now there are 230. Russia leads the entire system in same-store sales growth. In Q1, the country experienced a 45-percent sales increase, driven by development and same-store sales.

    "The big message we have for Yum! Brands this year is staying the course. We have growth staring us in the face all around the world. Everywhere we look, we see growth opportunities. We are the leader in emerging markets, not just China. We're continuing to build our brands the right way. And we have growth opportunity that is unparalleled," Novak said.

    Read more about operations management.

    Topics: Equipment & Supplies, Franchising & Growth, Marketing / Branding / Promotion, Operations Management, Pizza Hut

    Alicia Kelso
    Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine. View Alicia Kelso's profile on LinkedIn

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