The Dynamic Quad

Denise Odaro
Darius Hubbard
Monica Perez
Grace Ma

An Analysis of Yum Brands in China

Agenda
 Background
 Current Situation
 Challenges
 Recommendations
 Q&A
Background

*Yorkshire Global Restaurants, owner of the Long John Silver's and A&W All-American Food chains
Who is Yum?
 The world's largest restaurant
company
 36,000 restaurants
 Presence in 110 countries and
territories
 1.4 million associates
 Yum! is ranked #253 on the
Fortune 500 List
 2008 Revenues in excess of $11
billion
The Yum! System
Key business strategies:
 Build leading brands across China
in every significant category
 Drive aggressive international
expansion and build strong
brands everywhere
 Dramatically improve U.S. brand
positions, consistency and
returns
 Drive industry-leading, long-term
shareholder and franchisee value
Yum! Brands China
 Headed by Sam Su
 Mainland China is Yum! Brands #1 market
for new restaurants development worldwide.
The company brands in China are KFC, Pizza
Hut and East Dawning
More than 500 new restaurants last year in
mainland China (Q4 2008)
In 2008, operating profits for the China
Division were $469 million
KFC in Mainland China
Approximately 2,500 restaurants in 500 cities.
Pizza Hut in Mainland China
• 400 Pizza Hut restaurants in nearly 100 cities
• An additional 79 Pizza Hut Home Service delivery units. (Q4
2008)
East Dawning (Dong Fang Ji
Bai)
 A test cafeteria style restaurant was tested in Shanghai in 2004

The KFC business model was employed in the new East Dawning
which opened its first location in 2005 with

Features

Exclusively Chinese cuisine prepared to order



 Quick service

dished up in hard plastic bowls and plates instead of disposable

paper and plastic as at most fast-food restaurants

The restaurants are designed to resemble Chinese homes


East Dawning
 http://yum.com/company/china.asp
 Financial Overview
YUM! Brands, Inc.
China Division Operating Results
(in millions)
1998 1999 2000 2001 2002 2003 2004 2005 (e) 2006 2007 2008 (f)
FY FY FY FY FY FY FY FY FY FY FY
                     
 Company sales   $     246   $     336   $     421   $     569   $     722   $     871   $   1,082   $   1,255   $   1,587   $   2,075   $   3,058 
    Revenues          261          352          440          587          744          901       1,120       1,296       1,638       2,144       3,128 
                     
 Operating profit   $       20   $       39   $       56   $       63   $     120   $     161   $     205   $     211   $     290   $     375   $     469 
Restaurant margin 14.9% 17.8% 17.4% 14.9% 19.3% 19.8% 20.3% 17.4% 20.4% 20.1% 18.4%
System sales growth (c)    
   Local currency 20% 19% 17% 25% 23% 23% 11% 23% 24% 20%
   U.S. dollars 23% 19% 14% 25% 23% 23% 13% 26% 31% 31%
Current Situation
Darius Hubbard
What China Means (and will mean) to
Yum
Yum has leading position in
China
 Yum has a 16% restaurant chain market
share in China – its restaurants
outnumber McDonalds 3 to 1
 2500 KFC
 400 Pizza Hut
 Owns distribution centers (16)
 Active in restaurant communities
Distribution Centers
Community Activity
 First Light Foundation
 Awards scholarships
 Builds schools
 Chicky School Program
 Partnership with the Education Bureau
 Basketball Tournaments
 Year 1: 9,000 teams in over 150 cities, 48,000 players
 Year 5: 24,033 teams in over 400 cities, 140,000 players
But…SSS Growth Fell for the First Time Since
First Store Opening

 How did this happen?

 Global recession?
 Pricing?

 Health concerns?

 Worn novelty?
Challenges
Monica Perez
KFC Commercial
Pizza Hut Commercial
Strategy & Success in China
Strategy in China
 Strong brand
 Western fast food tailored to 
Chinese consumers
 Target and appeal to the young 
population and families
 Franchise stores rather than own
Successes in China
 First to market
 Food matches local tastes 
(chicken vs. beef)
 Tailored Offerings
 Western fast food is faster than 
Chinese fast food
 Lower costs and risks involved in 
franchisee management
 87% of total outlets owned 
and operated by franchisees 
in 2007
 Brand Comparison
Pizza Hut KFC East Dawning

Fast casual dining in a clean 
Casual dining format for  environment
Western-style menu  in full-
service restaurants
Closely adopted KFC’s 
Rapid growth of stores operational system 
Home delivery brand Pizza Hut  with Chinese food
Express appeals to those 
looking for a quick meal 
at home in urban areas  Use of multi-format -  
dessert kiosks, online ordering 
& home delivery service
Competitive Advantages
Own entire distribution  . Advantage for 
channel product innovation – 
Easier access to 2nd  & 3rd  tier cities speed in new product 
Provides economy of scale 
introduction

...... Multi-brand Units:
Tap into different & 
Multi-format diverse market niche

Market Leadership
 Immediate and Long Term Challenges in
China
Immediate Challenges
Industry & Long Term Challenges
Industry & Long Term Challenges
Health Consciousness Exchange rate fluctuation
Exchange rate fluctuation
Food Safety Scares Hike in real estate prices
Hike in real estate prices

Increase costs  reduction in profit

Global
margins
Economic Turmoil
Global Economic Turmoil

Rising commodity prices: shortage

Western
of pork,
Fast chicken
Food more expensive than
Western Fast Food more expensive than
(rising bird flu cases) local cuisine local cuisine

Intense competition – local and foreign Chinese consumer saving higher than
Chinese consumer saving higher than other developed countries
McDonald’s, Burger King, Dominos, Starbucks in a fragmented 
retail food market other developed countries
How to differentiate Yum! vs. competitors with low mkt entry 
barriers
Recommendations
Grace Ma
Recommendations for Moving
Forward
 Cost control: e.g. source alternative supply, own factories,
change food menu
 Continue to localize menu & be innovative to
differentiate:
 Tailor products to different segments of Chinese consumers
 Continue to upgrade logistics & expand distribution
network to support expansion
 Continue to acquire market share in 2nd & 3rd tier cities
by aggressive expansion
Recommendations for Moving
Forward
 Build integrated communication plans &
marketing systems to support its
diversification strategy
 Ensure sufficient cash flow and build
human capital to continue aggressive
expansion in China (& worldwide)
Recommendations for Moving
Forward
 Continue to monitor food safety & quality:
 Ensure proper implementation of food safety
policies in all stores, as well as up and down the
whole supply chain e.g. qualify all suppliers based
on food safety & quality standards, monitor and
audit hygiene standards & enforce regulatory
compliance
 Continue in R&D of special Chinese menu for different
regions in China
 Commercialization of Chinese cooking techniques
Build Brand - Focus on “Experience” +
Low Price
Marketing – Segmentation – Target niche market
 Commercials that continue to bond with Chinese consumers
 Promote via business newspapers/news channels; outdoor advertising in
business areas; sponsorship of Chinese Celebrities/ Olympic teams etc,
 Continue multi-branding strategy
 Continue to collaborate with other organizations e.g. sponsorships of
events (QQ.com and China Basketball Association)
 Continue consumer education e.g. Food health website showing
awareness of the importance of health food
Leverage Yum’s Resources to Continue
Building Strong Brand
Distribution channel – promotion & expand market share
 Expand online distribution channel & home delivery service to
appeal to Generation Y consumers
 Continue aggressive expansion in China and tap into 2nd & 3rd
tier cities to reach the growing number of middle income earners
 Expand Drive-thru distribution channel in retail outlets to capture
opportunities given increase in car ownership in China
Positive Outlook for Chinese
Market
 The Chinese market offers a wealth of opportunities for Yum!
Brands. It should continue to gather substantial local market
knowledge and respond to the market’s changing demands for a
varied product selection and convenience.
Fast Foodand PizzaGrowthProjectionsChinavsWorld
China: Pizza Full-service Restaurants
China: Pizza 100% Home Delivery/Takeaway
China: Chicken Fast Food
China: Asian Fast Food % CAGR 07-12
World Pizza Foodservice
World Fast Food

0.0 5.0 10.0 15.0 20.0

Positive Outlook for Chinese
Market
 As the US business continues to struggle and Yum! Brands will likely
find it even more difficult to prosper due to the economic downturn
in the country, China is going to become an even stronger focus for
the company, as well as for other operators
 While the economy in China has also been impacted, Yum! Brand’s
strong position and low-priced format should help it maintain
positive growth as consumers will continue to frequent places they
know and trust
 Yet depending on the length of time it takes for the economy to
recover and the impact it has on consumer psyche, Chinese
consumers who for the most part are disciplined savers, may
become more cautious about eating out especially in full-service
restaurants like Pizza Hut, thus possibly impacting in the short term
on the strong double-digit growth expected for the country
 Questions?

An Analysis of Yum! Brands in China

Presented by
The Dynamic Quad