KFC not chickening out of expansion plans in China

A KFC restaurant in Shanghai. Yum China has amassed a trove of spending and demographics data, allowing it to better forecast demand, cut food waste and boost profit margins. The savings have helped it avoid raising prices. A customer using the Smile
A customer using the Smile To Pay, or facial recognition payment system, at a KFC outlet in Hangzhou. Yum China Holdings positions its fast-food chains like KFC as a suite of fun, tech-driven brands aimed at China's growing middle class, with ice cream served by robotic arms, while customers can control the background music through their cellphones like a new-age jukebox.PHOTO: AGENCE FRANCE-PRESSE
A KFC restaurant in Shanghai. Yum China has amassed a trove of spending and demographics data, allowing it to better forecast demand, cut food waste and boost profit margins. The savings have helped it avoid raising prices. A customer using the Smile
A KFC restaurant in Shanghai. Yum China has amassed a trove of spending and demographics data, allowing it to better forecast demand, cut food waste and boost profit margins. The savings have helped it avoid raising prices. PHOTO: BLOOMBERG

SHANGHAI • KFC's owner in China is pushing ahead with expansion plans, opening two stores a day in the world's biggest consumer market and banking on technology to help it cut costs, even as carmakers and industrial companies signal demand there is deteriorating.

Yum China Holdings, the nation's biggest fast-food chain, which operates the KFC and Pizza Hut brands, is launching new restaurants and sees potential for over 11,000 more outlets, chief executive officer Joey Wat said in an interview.

While the trade war with the United States and the slowest economic growth since 1990 has companies like Caterpillar, Volkswagen and Apple warning that Chinese consumers are in retreat, Ms Wat remains upbeat on the outlook for fried chicken and pan pizza.

Yum is positioning itself as a suite of fun, tech-driven brands aimed at China's growing middle class, in stark contrast to their namesakes in the US that focus on no-frills value fare.

"We believe the runway for growth is very strong," said Ms Wat, a former AS Watson Group UK managing director who has been CEO of Shanghai-based Yum China for a year. "We are in 1,200 cities in China, which seem like a lot, but there are another 1,000 cities in China with no KFC. There's huge space for growth."

Yum China shares rose 1.6 per cent to US$41.60 in New York on Tuesday. They have jumped 24 per cent this year.

"China's economy is slowing but I don't think it will have a material impact on fast food," said Mr Jason Yu, Shanghai-based general manager of Kantar Worldpanel in Greater China. "The money and demand are always there for the fast-food market, but the key is how retailers can catch consumers' eyeballs."

  • 1,200

    Number of cities in China in which Yum China Holdings, the nation's biggest fast-food chain, which operates the KFC and Pizza Hut brands, has outlets.

    >11,000

    Number of new outlets Yum China is eyeing in China. In the long term, the company sees potential for more than 20,000 outlets in China as it continues to push into less-developed cities.

Spun off in 2016 from parent Yum! Brands, the fast-food giant's promise to investors to deliver access to China's blistering pace of growth has been unevenly fulfilled. Overall revenue has grown 25 per cent and net income has risen 33 per cent since 2016, but Pizza Hut, which it is pitching as a dining venue for middle-class families, has struggled to gain traction.

Ms Wat, 47, is pinning future growth on an all-in approach to using new technologies and consumer data. The company has amassed a trove of spending and demographics data from more than 160 million members in its KFC digital loyalty programme and 50 million members for Pizza Hut.

That has allowed the chain to better forecast demand, cut food waste and boost profit margins. The savings have helped the chain avoid raising prices, she said.

ROBOTIC SERVERS

KFCs in China take payment by facial recognition, ice cream is served by robotic arms, and customers can control the background music through their cellphones like a new-age jukebox.

Pizza Hut offers millennial inventions like fig and cranberry pizza.

"As Chinese customers are more sophisticated and diverse, retailers need to focus on the more segmented demand by offering various options," said Kantar's Mr Yu.

"Yum's use of technology to target tech-savvy customers, mainly in top-tier cities, is one strategy to lure business in the more mature markets."

At KFC, the average consumer spends only 30 yuan (S$6), said Ms Wat, adding: "Compared to businesses with much higher price points, we certainly have the advantage."

In the long term, the company sees potential for more than 20,000 outlets in China as it continues to push into less-developed cities beyond the crowded metropolises of Shanghai and Beijing, said Ms Wat.

When a KFC opens in a small Chinese town, jobs, logistics infrastructure and other restaurants and shops follow, making the chain a bellwether for economic development, she added.

CHINA HICCUPS

Yum China sales posted growth in the last quarter after store sales fell in the third quarter. Shares of the New York-listed fast-food outlet have gained 22 per cent this year, compared with the 3.5 per cent gain in Yum! Brands.

Chief financial officer Jacky Lo warned of "market softness" in China last month, and said it will be a "tough lap" in the first quarter compared to past performances.

The company has not managed to avoid the ongoing trade war between China and the US. After China slapped retaliatory tariffs on dairy imports from the US last September, Yum China switched its cheese supply to Australian and New Zealand sources.

Although hopes are high that Presidents Donald Trump and Xi Jinping will reach a deal this month that includes the immediate lifting of all tariffs, Ms Wat would not commit to returning to American dairy farmers.

"We will adjust according to what's going on, but a business of our size does not change its direction based on the news of the month," she said.

When Yum China spun off on the New York Stock Exchange in 2016, it said it was a chance for investors to capitalise on China's growth along with US standards of corporate governance. That proposition has not changed despite recent geopolitical developments, said Ms Wat. Besides the trade war, China had been in a stand-off with Canada over the arrest of Huawei chief financial officer Meng Wanzhou.

"The result of the spin-off is that the combined stock price has increased to a level that both companies are very happy about," she said.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 07, 2019, with the headline 'KFC not chickening out of expansion plans in China'. Print Edition | Subscribe