Local menu, managers are KFC's secret in China

Feb. 3 (Bloomberg) -- David Palmer, an analyst at UBS Securities LLC., discusses Yum! Brands Inc.'s fourth-quarter earnings, which exceeded analysts' estimates at 63 cents a share. Palmer, speaking with Deirdre Bolton on Bloomberg Television's "InsideTrack," also talks about the outlook for Yum's sales in China. (Source: Bloomberg)
By William Mellor
Saturday, February 12, 2011; 3:02 PM

On the edge of Tiananmen Square, across the street from Mao Zedong's tomb, He Yingying munches on a piece of chicken and gazes at the benign-looking figure beaming down at her.

"We love him," she says, bursting into an impish smile.

The 21-year-old student from Beijing's Capital University of Economics and Business isn't referring to Mao, whose iconic official portrait dominates the square. She's talking about the long-dead, white-bearded Kentucky colonel on the logo of the KFC restaurant where she's feasting on her favorite fast food.

In its home market, the United States, KFC is struggling as an also-ran to McDonald's - the world's biggest restaurant company - and feuding with some of its own franchisees over how to halt declining profits.

In China, Colonel Harland Sanders's image is a far more common sight in many cities than that of Mao. That accomplishment is striking in a country where foreign companies often stumble.

The secret to the success of KFC's parent company, Louisville-based Yum Brands, can be traced to its use of local ingredients - both in its management team and on its menus. In the 24 years it has operated in China, Yum has hired Chinese managers to build partnerships with local companies in its expansion drive and used their expertise to offer an array of regional dishes that appeal to domestic tastes.

Local flavors and fare

Today, KFC customers in China can buy a bowl of congee - a rice porridge that can feature pork, pickles, mushrooms and preserved egg - as well as a bucket of its famous fried chicken. In 2010, Yum expected to make 36 percent of an estimated $2 billion operating profit from 3,700 restaurants in China - eclipsing for the first time its total earnings from the 19,000 Taco Bell, Pizza Hut, KFC, Long John Silver's and A&W restaurants it owns in the United States. Yum announced Jan. 18 that it will sell its Long John Silver's and A&W chains in part to focus on China.

In the third quarter, Yum's profit in China soared 23 percent, while its U.S. profit dropped 2 percent. Yum posted $3.56 billion in fourth-quarter revenue, boosted by robust growth overseas.

In a country that Western companies such as Dunkin' Brands and eBay have struggled to penetrate, Yum has opened a new restaurant every 18 hours. It now has a 40 percent market share among fast-food chains, compared with 16 percent for McDonald's, according to Euromonitor International, a market research firm.

Yum, which started with one restaurant in 1987, now operates 3,200 KFCs and 500 Pizza Huts in 650 Chinese cities - stretching from the tropical southern island of Hainan to the North Korean border and the desert oases of the ancient Silk Road. KFC's target: to push that number to 20,000.

"Yum has become the most successful foreign company in China," says James McGregor, author of "One Billion Customers: Lessons From the Front Lines of Doing Business in China."

"They got in early," he says. "They adapted the product. They expanded aggressively, and they gave their Chinese managers real decision-making power."

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