For Yum!, the Whole World Is Fat City

With more outlets than McDonald's, the outfit behind Pizza Hut, KFC, and Taco Bell is now also on a roll in China, as execs explain

Chicken is the preferred protein in China, a fact that hasn't been lost on the managers at Yum! Brands (YUM ). Most people know the company by its high-profile fast-food chains -- Pizza Hut, Taco Bell, and KFC (formerly known as Kentucky Fried Chicken). It helps, too, that the image of Colonel Sanders, KFC's founder, seems to play as well in Beijing as in Boston.

With international expansion key to Yum's growth, China in particular is emerging to be an ever bigger source of future revenue and profits for the Louisville (Ky.) company. Someday, China have more KFC and Pizza Hut outlets than the U.S. does, Yum executives predict.

On the home front, Yum, which also runs the Long John Silver's and A&W All-American Food chains, is betting on its strategy of multibranding, or combining two of its brands under one roof. Some 12% of its domestic outlets now feature a KFC and Taco Bell, or some other combo, in the same location. Thanks in part to multibranding and overseas expansion, Yum is expected to deliver 11% higher profits in 2003 on 4% to 5% revenue growth.

HARD TO SWALLOW.

  Yum, which recently surpassed McDonald's (MCD ) in total number of outlets -- nearly 33,000 vs. just over 30,000 -- has its share of challenges, however. It has been underperforming of late against competitors when it comes to sales at restaurants open at least one year. These so-called same-store sales in November were up only 2%, vs. Wendy's (WEN ) 9.4% and McDonald's 10.2%.

What's more, a recent campaign developed to energize the KFC brand has attracted the scrutiny of federal regulators after a complaint from health-advocacy group Center for Science in the Public Interest that the ads were misleading. At issue were spots that presented fried chicken as part of a balanced diet and as more healthy than Burger King's Whopper Sandwich. Yum says it was just trying to communicate information about the brand. A new campaign is now in the works.

Recently, members of BusinessWeek's editorial staff discussed Yum's plans for growth and other issues with David Novak, chairman and chief executive officer; Aylwin Lewis president and chief operating officer; and Dave Deno, chief financial officer (Jonathan Blum, senior vice-president for public affairs, was also present). Edited excerpts of their conversation follow:

Q: International expansion is a big growth driver for you. What's your potential in China?

Novak:

It's our single biggest opportunity outside of the U.S. There are 450 million urban Chinese in a country where you have 1.3 billion [people]. We think, conservatively, 200 million of those people can afford our food every day.

Right now, we're in 12 of the 13 provinces. We're actually going into Tibet next year, so we'll be in all 13 provinces. There's no doubt in our minds that we'll have more restaurants in China, certainly for KFC and for Pizza Hut, than we'll have in the U.S. some day. We just opened up a Taco Bell Grande [in China].

Q: So what do you put in a Taco over there?

Novak:

About the same thing we would put in one here. Our products are basically executed the same way around the world. We will have regional regional variations. In China and the rest of Asia, they like spicier food. We will have more spicy items on the menu. We have Original Recipe [fried chicken] and pizza in every country.

Q: Which brand does best overseas?

Novak:

KFC is our biggest brand outside of the U.S. It has the most growth potential. Abroad, the menu is much more on-the-go-oriented. There are sandwiches and french fries. It's more like McDonald's than it is in the U.S., where Colonel Sanders built KFC more with the bucket business. We do offer that around the globe, but we're more fast-food oriented.

Q: Do you use the Colonel Sanders image outside the U.S?

Novak:

If you go to Japan, you will see a statue of him outside every one of our restaurants. We use an animated Colonel in a lot of our countries. In China, if you go into the restaurants, you will see the history of KFC, and you'll see a picture of the Colonel and how it all started. American brands are very popular.

Q: How often do you go to China?

Novak:

Two or three times a year. We found that there's nothing like being there. You cannot run China from Louisville, Ky. You have to have self-sufficient teams in overseas markets making things happen. In China, we have the same team basically that has been there for over 10 years. We have the dominant retail chain in China.

Lewis: International is so important to us. The other growth area for us is multibranding, or putting two brands together in the same retail space. It's tough to do. The industry looks at us and says, "These guys are nuts!" -- and we hope they continue to say that. But we think it's innovative. Our customers from our research tell us that they prefer two brands to one brand six-to-one. It gives them variety that's meaningful.

Novak: We think we'll get more profitability out of it this way. What drives volumes is variety. The problem is, no one is interested in a Taco Bell hamburger. Nobody wants a KFC taco. But put a Taco Bell together with a KFC, and you get more variety. You are able to improve your average unit volume and your cash flow because your customer likes it more.

Q: Since you're integrating all the brands so tightly, do you really need separate organizations for each one?

Deno:

This doesn't work unless you have great individual brands and differentiated operations. And we still have a lot of single-brand restaurants, and we have to have great brands under these multibranded ones.

Novak: We're working on the execution to move this forward. Last year, if you went to our analyst meeting, we told everyone we were going to do 700 multibranded units. This year, we're going to do 500. We still have the same opportunities. We're just slowing it down to execute this and make sure that the customers see the brands in the way they ought to be seen.

Q: How do you find people to achieve your goals?

Lewis:

We want people who are really excited about coming aboard. The quick-service industry gets a bad reputation. We're proud of our jobs. People often come in at entry-level wage, but that isn't where we want them to stay. The guy who runs all of our Pizza Hut operations got promoted this year. He has been in the business for 32 years. He started as a manager. He has no college education, but he's a very educated guy, and he knows the business very well.

The number that I'm most proud about in our organization is our turnover number. The industry average is 180% to 200% [a year]. Three-and-half-years ago at Yum, we were at 187%. This year, we're going to end up at 111%. You can't have excellent operations unless you have a stable crew. Our short-term goal is to get...down to 100%, because we have research that says at 100%, your sales and profits are six times better than when you have turnover at the industry average.

Q: As far as sales performance at the outlets, are you concerned that Yum's same-store sales have been lagging behind those of at least of a couple of big burger chains?

Novak:

Our biggest issue as a company is same-store sales growth in the U.S. But our biggest challenge is also our biggest opportunity. If we can grow our sales 2% to 3% on a same-store basis, while we're working on improving our operations, we can have some even better years.

Deno: If you're looking at same-store sales growth at this particular moment in time, Wendy's and McDonald's have had high numbers. But if you go back and look at what Taco Bell has done for the least two to three years, this is the third year of strong sales growth out of Taco Bell.

Q: What about KFC? What are your plans for the image and offerings of the brand after the most recent ad campaign kind of misfired?

Novak:

First of all, I don't think it misfired. There were some things maybe we would do differently as we go forward. What we tried to do is communicate more information about our product that people didn't know. People didn't know they could eat two chicken breasts and have the same number of fat grams that you could get in a Whopper. If you talk to customers, they would tell you that you have significantly more fat grams than in a Whopper. All we were trying to do is lay out the story.

We think that we're on the right track with KFC. We have to become more relevant to the customer in terms of our menu offerings and how we talk about our core product. We will be selling oven-roasted products next year. We will have new value offerings next year, all geared toward making the brand more relevant.

Q: Oven-roasted chicken? Are you developing any Atkins or other diet offerings?

Novak:

KFC is working with Atkins and Weight Watchers and other associations. First and foremost, we will serve good, indulgent fast food. That's what we make. But we think there are opportunities to provide more choices to our customers.

Each one of our brands is working on things right now. KFC will launch the oven-roasted chicken line. We're testing salads. At Pizza Hut, we introduced Fit 'N Delicious Pizza. It's basically a product that is stacked with lower [calorie] cheese and toppings. At Taco Bell, we have a Fresco line where we offer 10 products that have under 10 fat grams. We're looking at other ways to provide more choice in these areas.

By Eric Wahlgren in New York

Before it's here, it's on the Bloomberg Terminal. LEARN MORE