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Yum plans widescale international growth

Executives at investor conference say Yum is only “on the ground floor” of overseas growth

With more than 38,000 restaurants in 117 countries, Yum! Brands Inc. is the largest restaurant operator in the world. But chief executive David Novak said repeatedly at the company’s investor conference this week that Yum is only “on the ground floor” of international growth.

And while Louisville, Ky.-based Yum’s 4,000-plus-unit division in China has provided its most robust sales and unit growth over the past few years, Novak expressed optimism that the new Yum Restaurants India division and nearly 16,000-unit Yum Restaurants International, or YRI, could achieve similar results.

Novak said Yum would have many different paths to grow with KFC, Pizza Hut and Taco Bell in all areas of the world. KFC, for example, would continue to grow rapidly in China, as that country continues to build out its infrastructure, and in other foreign markets with locally relevant menus.

In Yum’s international system, Pizza Hut Casual Dining offers consumers a more traditional dinnerhouse experience beyond pizza, but there still is an opportunity to do a mid-scale breakfast experience and grow average unit volumes, Novak said.

Taco Bell has yet to grow as robustly outside the United States, but will change within the next few years, Novak said. The brand opened in 10 new markets in the past three years.

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“It’s going to take us a decade to really get Taco Bell up and running, but that’s OK,” Novak said. “We’re just building the pipeline and we can take our time. We’re acting with urgency, but it takes time to get menus tailored and get the value proposition right. But we will definitely make Taco Bell a global brand some day.”

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Yum Restaurants China has produced the bulk of Yum’s total operating profit the past few years, and Novak and chief financial officer Rick Carucci expect that to grow as the segment continues to experience high unit count and same-store sales growth. The division’s people capability is another source of optimism, Novak added.

“I’m always inspired when I go to China,” Novak said. “Over 90 percent of restaurant general managers there have at least a college education and they’re customer maniacs. This kind of capability is absolutely our secret weapon and the reason why we’re going to open more than 600 restaurants in China.”

The company also has opened a management academy in China with the goal of making Yum the place Chinese people want to go to learn how to run any business, Novak added.

Yum is projecting more than 600 openings in China next year, with a development goal of 9,000 locations in the country by 2020, Carucci said. Average unit volumes in China are $1.7 million.

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Novak is even more bullish on the future of Yum Restaurants China because of the growth of the middle class, which is estimated to include 600 million people within the next 10 years.

“When I went to China in 1998, I was struck by how parents and grandparents lined up to go buy KFC for their children, but then would watch them eat, because they couldn’t afford to it eat themselves as well,” Novak said. “Now when you’re at KFC in China at lunch, we have a broad, ubiquitous consuming class in there.

“There are going to be a lot of challenges in China with labor inflation and food costs, but the one tailwind we have that’s undeniable and unassailable is this growing consuming class.”

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In India, where Yum has more than 150 units, business is expected to grow at a pace similar to the China division’s, which is why the company decided to form a separate business unit, Yum Restaurants India, led by president Niren Chaudhary.

Chaudhary said China’s growth story is the inspiration for Yum India, and “India today is at the same inflection point China was before it took off about 10 years ago.”

Novak credited relevant, differentiated products for KFC in India, such as the Vegetarian Zinger sandwich and the Krushers beverage lineup — which accounts for 8 percent of sales — for the brand’s “tremendous upside” in that country.

Taking the menu beyond chicken was a lesson Yum India learned from KFC in China, Chaudhary said, adding that his division “went to school on Yum’s success in China” and would emulate two major moves.

“First, we will build as broad a concept as early as possible for KFC, to be more than chicken,” he said. “We also will establish the first-mover advantage. That taken together implies that KFC needs to be innovative and drive leadership by penetrating faster than our competition with flagship locations.”

Yum India plans to grow to 550 restaurants by 2015, and the current average unit volume there is $1.1 million, Chaudhary said. One snag for building the business in India that did not occur for China is the lag in infrastructure development, Chaudhary said.

“India is muddling through that process, which may constrain us at some level,” he said. “But I think we can create the brand almost anew, because we’re on the ground floor. That’s the China model, and that’s what we’ll do.”

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Even accounting for the loss of the India division, the rest of YRI still has plenty of room for expansion, said Micky Pant, chief executive of YRI.

“We’re reaching the tipping point with several of our initiatives,” he said. “The remaining part of the world outside China, India and the U.S. is 4 billion people. If you take only the top eight countries that make up YRI, that’s more than 1 billion people, and we still only have 2,000 restaurants [in those markets].”

YRI has made footholds in Western Europe, Africa and Russia that could lead to accelerated growth over the next decade, Pant said. He noted that YRI achieved the kind of scale in Russia in three years that ordinarily would have taken 10 years by cutting a deal with the Rostik’s chicken chain, making the owner a franchisee of YRI and co-branding his Rostik’s units with KFC.

Novak also pointed to Russia as a market demonstrating the room for growth YRI has. Yum entered the country several years ago with the Rostik’s deal and now is in the midst of converting all co-branded locations just to KFC. Some of the first full KFC units in Siberia have average unit volumes of $1.4 million.

“Even where we don’t have our brand in its greatest form, we’re doing fantastically well,” Novak said. “We have 150 units in Russia with great margins, and we haven’t even begun to do this brand right.”

Yum’s 600 restaurants in South Africa give it a beachhead to train restaurant managers and franchisees to spread KFC and Pizza Hut across Africa, home to 1 billion people, Pant said. Over the past few years, Yum has opened in Nigeria and Kenya.

He added that KFC’s systems in Germany and France are starting to reap dividends. Germany is close to replicating the brand’s success in France, where KFC has some of its highest average unit volumes in the world and has begun to grow its size and market share through national TV advertising.

“The biggest challenge and opportunity for us is brand awareness,” said Ivan Schofield, Yum’s general manager for Western Europe. “Next year, we’ll be on the air for 24 weeks.”

Schofield’s goal is to get KFC to 300 units by 2016, with about two-thirds of those units franchised and about 220 of them located outside Paris in France’s other provinces. The average unit volume in France’s 133 current restaurants is approximately $4 million.

Germany’s ability to take best practices from France gives Yum officials confidence that YRI as a whole will continue to grow, even without India, Novak said.

“On the surface it looks like an unwieldy division, but it’s really much smaller, and people are sharing knowledge from market to market,” Novak said. “We think that YRI will evolve, and as it does, we’ll be pushing more of our resources out into the field where it really happens.”

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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