Yum! Is a tasty success story in China

Having cited the pitfalls and minutia of operating in the middle kingdom, let’s look at a company who is making it work.

If you are wondering what it takes to find success in the world’s second-largest country by population, one of the best case studies to read is David Bell and Mary Shelman’s Dec. 6, 2010, Harvard Business School’s, Yum! Brands case study. For a look go to www.ifama.org/events/conferences/2011/cmsdocs/YumChina.pdf.

Yum! Brands is also cited for its prowess by James McGregor, author of “One Billion Customers: Lessons From the Front Lines of Doing Business in China” (Free Press, 2005). It’s well worth the reading. He states “Yum has become the most successful foreign company in China … They got in early, they adapted the product, they expanded aggressively and they gave their Chinese managers real decision-making power.”

The following is included to give you a taste of the report and its lessons.

Kentucky-based Yum! Brands’ China group operates KFC, Pizza Hut and Taco Bell restaurants in China.

The story begins in 1987 with one restaurant in Beijing that was built to seat 500 and ends up doing an average of 9,000 customers a day. The total investment is recouped in one year. In 1989, Sam Su who grew up in Taiwan, takes over the four existing stores in China. He realizes that sales are due, not to the taste of the food, but the novelty of their bright, shiny, clean shops, which let millions of Chinese customers experience their first taste of the West. He steps down from his regional duties to concentrate on the Chinese market and spends a large amount of time putting together a team of Chinese-speaking staffers who have international experience in Western fast food.

In 1992, after Deng Xiao Ping makes his “opening up” speech, the phone starts ringing. Suddenly, instead of offering obstacles, China’s cities are clamoring for shops. McDonald’s decides on a “big four” strategy that concentrates on China’s four largest cities. In response, Yum! decides to pursue a national strategy that begins with 16 beachhead cities. With its Chinese speaking staff, Yum! is able to make this transition quickly and begins work on creating a vertically integrated supply chain, which starts with animal feed and fertilizer and feeds into a state-of-the art national logistics system, described today as being second only to the People Liberation Army’s.

Computerized tracking, e-mail ordering by individual stores, 11 full service logistics facilities and extensive and ongoing contingency planning now supply over 3,200 KFC’s and 500 Pizza Huts in over 650 cities throughout China.

China has more than over 500 cities with populations of more than 500,000 people, which means KFC has penetrated beyond the 400,000 population mark, the largest and most comprehensive private penetration of the Chinese market by any company to date. Yum! now opens a new restaurant every 18 hours; each one costs less and produces more revenues than their U.S. counterparts.

The result, in the third quarter of 2010 China’s 3,700 restaurants brought in more revenue and profits than Yum!’s 20,000 U.S. stores. In terms of profits alone China contributed over half of the entire Yum! global brand 2010 profits.

It is the largest restaurant chain in China, has the most recognized global brand among urban residents and its fast food market share is 40 percent, compared with McDonalds’ 16 percent.

What is different about a KFC in China is that you will find 50 menu items instead of the 29 you would find in U.S. stores. Although you can still find a number of the standards you would expect to see, the rest of the offerings have been adjusted to Chinese tastes, including congee (rice porridge), shrimp burgers and chicken wraps, offering varied and healthier options for frequent diners. KFC has proactively responded to concerns about the health effects of “junk food” by offering healthier and more varied selections, doing away with supersizing, making fruit juices standard with kid’s meals and sponsoring children’s athletic leagues.

At the same time, Yum! has increased profits by becoming the country’s largest food delivery business, opening up for breakfast and switching from a franchise to a company store model (90 percent of the operations in China are owned by the company as compared to 15 percent in the US and 12 percent internationally).

What are the lessons? Yum! succeeded because its management was allowed to make local decisions about how to run the business, which allowed them to act quickly as the opportunities and challenges arose. Perhaps this is a lesson worth learning for those companies that believe that they can conquer the Chinese market from their corporate offices outside of China.

What is the future? Yum! has their sites on 20,000 stores which at current revenue levels would produce $6 billion in profits. So what’s your plan?

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