Yum Brands taking KFC to China's smaller cities

Published on NewsOK Modified: December 6, 2012 at 3:21 pm •  Published: December 6, 2012
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NEW YORK (AP) — The owner of KFC and Pizza Hut is taking its fast-food menus to the lesser-known regions of China, with plans to set up shop in smaller cities throughout the key market.

After expanding in China's biggest cities in recent years, Yum Brands Inc. is focusing on populating the country's less urbanized areas. Building in those outposts of the developing nation will give it the kind of infrastructural advantage that McDonald's established decades ago in the U.S., CEO David Novak said at the company's investor conference Thursday.

Yum, which also owns Taco Bell in the United States, is already the biggest Western fast-food chain in China, with about 5,400 locations, compared with 1,600 for McDonald's. The nation's booming economy has been a boon for Yum, helping its profits increase at least 10 percent over the last several years. But with competition intensifying and economic growth slowing, Yum has hit a snag as well, with investors fearing its brands could be losing their luster.

Last week, Yum said it expects a key sales figure to fall 4 percent in China in the fourth quarter, marking its first decline since 2009. A year earlier, sales at established restaurants had surged 21 percent. The company's stock dropped 10 percent after the announcement.

Also pressuring results in China are the company's rising labor and rental costs in big cities such as Shanghai, Beijing, Guangzhou and Shenzhen. As a result, the company said it would be more selective about expansion in such metropolitan areas.

But executives noted that there is still plenty of room for growth in smaller cities, with the Chinese government investing heavily in transportation infrastructure. While Yum has nine restaurants for every 1 million people in larger cities, it has just two per million people in smaller cities.

Within the first three years of opening, the company noted that new restaurants in smaller cities bring in annual sales of about $1.4 million to $1.5 million, showing there's an appetite for its fried chicken and pizza even less urbanized areas of China.

"We're only on the ground floor of China's development opportunity," said Weiwei Chen, Yum's chief financial officer of China.