Question:
What future challenges does YUM face in China? What are the general lessons from this case for Western companies in China?
Note:
1. The answer should cover all questions above
2. The answers should be at least 600 words.
3. Use the data on exhibit/appendix
4. Do not use other sources other than this article. Just based on your analysis and arguments
9-511-040
R E V : F E B R U A R Y 1 4 , 2 0 1 2
________________________________________________________________________________________________________________
Professor David E. Bell and Agribusiness Program Director Mary Shelman, Global Research Group, prepared this case with the help of HBS- APRC Senior Researcher Nancy Hua Dai. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2010, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
D A V I D E . B E L L
M A R Y S H E L M A N
Yum! China
We have the potential to become the defining restaurant company in the world. — Sam Su, chairman and CEO of Yum! Brands China Division
Sam Su, chairman and CEO of Yum! Brands China division and vice chairman of Yum! Brands, Inc., guided his American guests through the crowd at the Shanghai World Expo in early October 2010. This type of tour had become a routine event in Su’s schedule since the huge exhibition opened six months earlier. Besides being a sponsor of the U.S. Pavilion, Yum! Brands (Yum)—which was the parent company of several restaurant chains, including KFC (short for Kentucky Fried Chicken), Pizza Hut, and Taco Bell—operated 14 eateries spread across the grounds. So far, some 61 million people, more than 90% of them Chinese, had visited the 2.6 square kilometer venue.
Since the first KFC opened in Beijing in 1987, Yum—under Su’s leadership—had built the largest restaurant company by far in mainland China. Averaging more than one new restaurant opening a day for the past five years, Yum now had over 3,000 KFCs (nearly three times as many as McDonald’s) in 650 cities and nearly 500 Pizza Huts in 120 cities. Yum also operated the largest food delivery business in China, serving customers out of 1,400 KFC stores and over 100 dedicated Pizza Hut Home Service units.
Yum was the largest restaurant company in the world in terms of the number of units. The company reported 2009 sales of $9.4 billion from approximately 37,000 restaurantsa in over 110 countries (20,000 in the U.S.), net income of $1 billion, cash from operations of $1.4 billion, and over 1 million employees. In 2009, BusinessWeek listed Yum as one of only five companies in the world
with two top-100 brands.b (See Exhibit 1 for a description of Yum’s restaurant brands in 2010, and Exhibit 2 and Exhibit 3 for Yum financial information.)
On October 4, 2010, Yum reported third-quarter revenues in China of over $1.1 billion— surpassing U.S. revenues for the first time. China contributed almost half of Yum’s operating profits for the quarter (see Exhibit 4 and Exhibits 5a, 5b, and 5c for Yum results by area). Many analysts expected that Yum’s China business, driven by a rapidly growing middle class, would be twice as large as its U.S. business within five years. “China is still a developing country, so there’s lots of room
a Restaurants were operated either by the company or by independent franchisees or licensees. Franchisees ranged in size from individuals owning just one unit to large, publicly traded companies.
b The other companies included Nestlé (Nestlé and Nescafé), Toyota (Toyota and Lexus), P&G (Gillette and Duracell), and LVMH (Louis Vuitton and Moet & Chandon). BusinessWeek, 2009 100 Best Global Brands.
For the exclusive use of , 2019.
511-040 Yum! China
2
to grow,” noted Su. “But before rushing to open thousands more stores, what should we be doing to forestall some of the problems that are now plaguing the fast-food industry in the West?”
Building a Dynasty in China
KFC’s top management became interested in China in the mid-1980s, when there were no Western fast-food restaurants anywhere on the mainland. Company executives believed that KFC’s chicken- based menu would be more appealing to Chinese consumers than the menus of other American chains, which mainly served beef.
The first Chinese KFC opened in Beijing in 1987, when many Chinese still wore blue Mao suits and bicycles were the main form of transportation. Located in bustling Tiananmen Square, the restaurant was brightly lit, air-conditioned, spotlessly clean, and could seat 500 people. The restaurant was a success, serving an average of 9,000 customers a day; the company was able to recoup its investments within one year. “People loved going to KFC,” explained Su, a Taiwan-born
Chinesec who had joined the company in 1989 as director of marketing for the North Pacific and, in December of the same year, became general manager of the four-store China KFC operation. “It was an event. Some couples even held their weddings there. But to be honest, customers didn’t really like the food. It didn’t taste very good. We didn’t have a supply chain yet, so we had to use what was available.”
Over the next five years, Yum slowly opened new restaurants. “We wanted to go faster, but the government held us back,” recalled Su. “They were more interested in attracting foreign companies that could bring technology.” Yum opened the first KFC in Shanghai in 1989 and the first Pizza Hut in Beijing in 1990, becoming the first foreign company to serve pizza to Chinese customers. “It was not just about Pizza Hut; it was about the whole Western dining experience with appetizers, soup, and salad,” commented Su. “For many customers, it was their first experience with Western food.” The early days were not without missteps: for example, KFC’s first advertising slogan was “finger lickin’ good.” Most Chinese people did not appreciate its meaning; on the contrary, they thought that licking your fingers was unsanitary, noted one manager.
The pace of expansion increased dramatically in 1992, the year that Chinese leader Deng Xiaoping
made his famous southern tour.d Su recalled how that trip affected Yum’s business in China:
In his speeches Deng said, “China is moving too slowly. We should open up the rest of the country.” Almost overnight our phone started ringing off the hook. Every city and province was now looking for foreign investment. Of course, McDonald’s, which had opened its first mainland restaurant in 1990 in Shenzhen, was receiving the same phone calls. We had to make a decision: Should we concentrate on the four big, Tier 1 cities and fight with McDonald’s— which had decided to focus on these—or should we expand to other markets? We knew that KFC, which was based in Shanghai, couldn’t get to places like Shenzhen or Guangzhou very quickly compared to McDonald’s, which was based in Hong Kong. We decided to build a
c Su graduated from National Taiwan University with a chemical engineering degree and received an MS in chemical engineering from Pennsylvania State University and an MBA from the Wharton School of Business at the University of Pennsylvania. Before joining KFC, Su worked for Procter & Gamble in Germany and Taiwan.
d In the spring of 1992, Deng visited several southern cities and made speeches calling for more radical economic reforms and the further opening of China to the outside world. These speeches were credited with jumpstarting the country, which had been in a state of lockdown after the Tiananmen uprising in June 1989.
For the exclusive use of , 2019.
Yum! China 511-040
3
national business. We rushed to set up 16 “beachheads” to grow from and to develop a countrywide supply chain to support them.
Su’s strategy was to build a nationwide restaurant chain that would be “rooted in China, be part of China.” He explained:
My vision even back then was that one day our restaurants would be all over China, reaching even the smallest towns. However, they would not be seen as a foreign presence but as part of the fabric of the local community. We wanted people to feel good about having a KFC in their town. We could do that by making them very relevant to Chinese people. Our opportunity was to take the best ideas from the U.S. fast-food model and adapt them to serve the needs of the Chinese consumer.
Building a Team
To implement his growth plans, Su needed people:
We needed to expand on multiple fronts but, at that time, there was no country head for China, no staff. I knew the team needed to be based in China, rather than trying to run China from Taiwan or Hong Kong. I wanted individuals with previous restaurant experience, and I also wanted people who could write and speak Chinese and understand the Chinese consumer. I recruited ethnic Chinese from McDonald’s in Taiwan, from KFC in Singapore and other places like Hong Kong and Malaysia. Instead of using compensation to attract them, I sold them on the opportunity. I said, “We can do something significant together. At McDonald’s, the model is already in place, the game is set. KFC is a blank canvas. We have the opportunity to create something that doesn’t exist. We can make this brand into whatever we want it to be.” I recruited 50 people. Many of them are still here today.
One of Su’s recruits was Angela Loh, now chief marketing officer for Yum! China. Loh spent her early years in Taiwan, and completed high school and college in the U.S. before returning to Taiwan in 1984. McDonald’s was just getting started there when she joined as a management trainee. Loh, who had eight years of restaurant operations and training experience when Su contacted her in 1992, recalled his persistence:
Sam called me and asked me to join his team. I didn’t want to move to China, or to join KFC—which was a distant number two to McDonald’s in Taiwan. So I said no. Sam kept calling my house every few weeks. During one call, he asked if there were any jobs that I would like to try that I hadn’t done before. I said marketing and purchasing—because I didn’t like how they were run at other restaurants. Two months later, Sam called again and offered me both jobs. He kept calling until I accepted.
Another early recruit was Mark Chu, now president and chief operating officer of Yum! China. Like Loh, Chu was working at McDonald’s in Taiwan when Su called. “McDonald’s was a great company,” Chu explained. “But as a Chinese in Taiwan, returning to China was something I dreamed about my entire life.”
Ownership
At the time that Yum started in China, the government did not allow foreign companies to operate without a local partner. The first KFC and Pizza Hut restaurants in Beijing were owned through a joint venture. Yum also tested franchises in some interior territories, such as Xian. (Franchising was a
For the exclusive use of , 2019.
511-040 Yum! China
4
common strategy in the fast-food industry, since it allowed quick expansion into new areas and generated large up-front cash payments.) In the early days, local joint venture partners and franchisees helped Yum navigate the complexity of operating in China, including obtaining the required permissions from the government, getting access to preferred locations at the best prices, attracting workers from their secure-for-life state jobs, and securing supply and distribution.
The government began allowing wholly owned foreign enterprises in the early 1990s, and Yum quickly changed to a strategy of company-owned units. This allowed the adoption of systemwide quality standards, centralized purchasing, and a greater focus on brand building. “We also knew that company-owned units were the best way to ensure superior and consistent service,” remarked Chu.
Investing in a Supply Chain
In most countries, Yum relied on third-party food service companies and logistics providers for its restaurant supplies. These third-party providers did not exist in China in the 1990s. To meet the demands of its rapidly spreading network of restaurants, Yum established its own distribution company in 1997. “We knew that if our restaurants were going to cover the country, then we had to build our own warehouses and run our own fleet of trucks,” explained Su. “This was very expensive when we only had a few units in an area, but necessary to ensure that we had enough safe, consistent food and supplies. Incrementalism is not enough if you want to be great. I believe in taking a ‘future- back’ approach—looking ahead to where we want to be in 10 or 15 years and building the system that will get us there.”
Yum was committed to sourcing in China whenever possible. It found local raw material suppliers and worked directly with them to improve quality, ensure food safety, and increase capacity. This was especially critical for poultry, KFC’s signature product. “We’ve always viewed supply chain as a critical enabler,” noted Su. “We work with our suppliers to build their capabilities. We stress the importance of knowledge transfer, and even arrange for them to go overseas to learn. We are aligned around purpose. They see the results of their efforts, that hard work gets rewarded.”
Yum’s quality assurance team developed a comprehensive quality management process and supplier rating system called Supplier Tracking Assessment and Recognition (STAR), which was implemented throughout China in 1997. Review of STAR ratings allowed Yum to identify and concentrate purchasing with the best-performing suppliers, ultimately leading to improved quality and lower cost of goods.
Accelerating Growth
In 1997, PepsiCo, which owned KFC and Pizza Hut along with one other restaurant brand, spun off the three into an independent company called Tricon (later renamed Yum). PepsiCo had invested around $100 million in China. Over 100 restaurants were operating in 33 cities across the country, and sales from company-owned and franchise units had grown to around $300 million. Su described the years under PepsiCo as the “Wild West”: “Pepsi wasn’t a fast-food company. No one really understood the business. We kept them very well informed about what we were doing, and they were happy for us to keep moving forward as long as we produced good results.” When Tricon was created in 1997, China featured prominently in the company’s strategy. The division’s first mission statement read: “To become the best restaurant company not only in China but the world.” “A big opportunity deserved a big goal,” commented Su, who was named the first president of the China division in 1997.
For the exclusive use of , 2019.
Yum! China 511-040
5
The company opened its 300th unit in 1999. That year, Yum estimated that over 2 million Chinese ate in its stores every day, and, in an A.C. Nielsen survey, KFC was identified as the most recognized global brand among urban consumers in China. Yum continued to open about 100 restaurants a year until 2002, when Su challenged his group to pick up the pace. “We were really proud that we were opening 100 restaurants a year,” recalled Loh. “But Sam—who is never satisfied—said, ‘So what! What would we need to do differently if we were opening 400 restaurants a year? What capabilities don’t we have?’ People started to think and to work on a plan.”
Targeting 400 new restaurant openings a year required a step change in development activities (e.g., site identification, lease negotiations, construction, and licensing), supply and distribution capabilities, and training (to provide new restaurant managers and staff). Chu reported that human resources were the biggest bottleneck to growth. “The number of stores we can open is almost 100% related to our people capability,” he said. “We decided the only way to prepare enough staff was to make every restaurant a training restaurant.” In 2008, the number of restaurant openings surpassed 500 (see Exhibit 6a for a history of store openings and Exhibit 6b for stores by format).
Yum! China Division in 2010
By October 2010, Yum had over 3,600 restaurants spread throughout China (see Exhibit 7 for a map of locations). More than 90% were company-owned, compared to 15% in the U.S. and 12% in other international markets. In the third quarter of 2010, sales at China locations open a year or more rose 6%, compared to 1% at U.S. locations. China’s restaurant operating margin for the quarter exceeded 25%, well above the U.S. margin of 14%. Yum had 250,000 employees in China in 2010, and hired and trained about 30,000 new people a year.
KFC
KFC outlets in China were large by U.S. standards (about 300 to 450 square meters compared to 180 to 280 square meters in the U.S.). Most were sited in locations with very high foot traffic. Some opened onto the street, but many were in retail or office developments. Most stores were open for breakfast, and one-third were open 24 hours a day, although these were mainly in the larger cities. KFC opened the first drive-through store in China in a Beijing suburb in 2002.
Restaurant interiors, which were more modern than in the U.S., were decorated in KFC’s traditional red-and-white color scheme. Colonel Sanders’ (the iconic founder of KFC) image featured prominently in indoor and outdoor signage and advertising. There were long counters with numerous ordering stations staffed by meticulously dressed and groomed employees. Every restaurant had a hostess, who greeted customers and often organized activities for children. Seating was plentiful and customers were encouraged to linger in the brightly lit, climate-controlled, spotlessly clean space. “We want KFC to be a place to come with your family, a place where students can sit and do homework,” commented Chu. (See Exhibit 8 for photos.)
The menu at Chinese KFCs was lengthy, with 50 items, compared to approximately 29 in the U.S. (See Exhibit 9 for a list of China menu items.) While customers could order “Original Recipe” fried chicken, over time Yum had customized its menu to appeal to Chinese tastes by introducing spicy chicken dishes as well as local dishes. “The typical model is to take what sells in the U.S. to this part of the world,” explained Joaquin Pelaez, senior vice president and chief support officer. “But that doesn’t work in China. Here, food is culture—at the very heart of society. It must be adapted. Sam saw that from the beginning.” (See Appendix A for background on the Chinese diet.)
For the exclusive use of , 2019.
511-040 Yum! China
6
Localized items included wraps (soft tortillas) with fried chicken pieces and local sauces; chicken, fish, and shrimp “burgers” (sandwiches served on freshly baked buns); and local favorites such as egg tarts, fried dough sticks (usually sold in street stands), and soy-milk drinks. Corn on the cob was popular with many Chinese consumers, but KFC replaced coleslaw (a shredded cabbage salad popular in the U.S.) with a cold chopped vegetable salad consisting of corn, carrots, and mushrooms. Two new rice dishes had recently been added. “It’s common for Chinese to eat out in groups at lunchtime,” said Loh. “It’s likely that someone in the group wants rice. The more variety we have, the more often a customer can come back.” One young, white-collar consumer agreed: “We don’t go out to get chicken; we go out to get lunch!”
KFC offered the same menu throughout China; however, it had introduced different spice levels. “There are big differences in the preferred levels of spiciness across regions,” noted Loh. “We were serving the same recipe to everyone. Shanghaiese customers complained the dish was too hot, while customers in Sichuan and Hunan complained it was too bland. We have changed the recipe to suit the region instead of trying to have one recipe that everyone likes.”
Most products were prepared in the restaurant. Chicken was delivered chilled or frozen, then breaded and fried in the store. Because of the greater variety of product offerings, the back end of a Chinese KFC was more complex than that of a normal fast-food restaurant. Chinese KFCs had around 60 employees, compared to around 35 in the U.S. Similar to the U.S., food in China was cooked to inventory rather than to meet individual orders. Many products needed to be consumed quickly after they were prepared. The high traffic in the locations made this possible. “U.S. restaurants can’t have this variety because they don’t have this volume,” commented Su. (See Exhibit 10 for a comparison of KFC restaurants in China and the U.S.)
One American customer, visiting a KFC in Shanghai for the first time, remarked:
Americans view fast-food restaurants as a place to get food that is usually tasty, mostly unhealthy, priced cheaply, and served promptly. However, the Chinese view these same restaurants as just that, a restaurant. It is a place that is spectacularly clean with lots of neatly dressed, smiling staff and many dining options. Except for the fried chicken, the menu is almost unrecognizable to someone used to KFC in the U.S. It is super-localized.
KFC customers spent around $2.50 to $3.50 on fast food during every visit. The average KFC customer ate there once every three months, but this varied depending on whether they were light, medium, or heavy users. KFC had broad appeal across age groups.
Over the past five years, Yum! China had increasingly focused development efforts on smaller cities. In 2009, KFC stores were almost evenly split between larger and smaller cities (see Table A), compared to 60% in the largest cities five years earlier. Loh noted that KFC was positioned differently depending on whether the restaurant was in a Tier 1 or Tier 2 city, or a smaller city:
In Tier 1 cities, KFC is more of a functional brand. There’s more competition. We track prices very carefully. In smaller cities, KFC is still an aspirational brand, visited primarily on special occasions. Menu prices are pretty consistent across China. Customers in smaller cities spend about the same amount on each visit compared to their larger-city counterparts, but they make fewer visits. They may even be a bit less price sensitive, since visits are usually for a special occasion.
For the exclusive use of , 2019.
Yum! China 511-040
7
Table A KFC Locations in China, December 2009
City Tier
Number of Cities
Entered Total Population
(millions) Number of KFC Units
1 4 52 642
2 26 81 814
3 60 65 413
4,5,6 566 140 1,003
Total 656 338 2,872
Source: Company documents.
Pizza Hut
Pizza Hut in China was positioned as a full-service restaurant, offering a “five-star dining experience at a three-star price.” Restaurant interiors were contemporary (see Exhibit 11 for photos), and the menu was extensive—running to 30 pages or more. “Chinese consumers like a lot of variety. They get bored with only pizza,” commented Loh. Appetizers included chicken wings (the most popular), fried squid, and onion rings. Pizzas (offered with two types of crusts) and pasta dishes featured toppings designed for local tastes, such as a seafood pizza topped with prawns, squid, and crab sticks and spaghetti with bacon in black pepper sauce. Entrees ranged from beef steaks to lamb shanks to salmon rolls. Other international items brought in to cater to the Chinese palate included escargot (snails) in garlic oil, clam chowder (soup), tiramisu (an Italian dessert), French-style crepes, and espresso drinks.
Pizza Hut, which was more expensive than KFC, traditionally had attracted slightly older customers; however, in 2010 Yum was working to attract younger patrons to the chain. It added several lower-priced “snack” items to the menu and gave discount cards to college students. “We want these younger customers to grow up with Pizza Hut,” explained Loh. “We now offer options so
Pizza Hut can be as expensive or as cheap as the consumer prefers. Before, pizza was 69 yuane [about $10]; now there are less expensive options at 29 yuan and 49 yuan [about $4.25 and $7.00].” Pizza Hut was also developing new offerings, such as a business lunch with guaranteed service in 15 minutes on a limited number of items, and afternoon tea (coffee and a dessert) to compete with Starbucks. “We are targeting different parts of the day by understanding what people want at those times,” said Loh. “Afternoon tea is very popular with white-collars. They like that they can sit in a nice environment and be served at the table. Our occupancy rate in the afternoons has gone up from 20% to 80%.”
Organization and Culture
Given China’s history, building a successful business—especially one that depended on hundreds of thousands of young employees spread across the country—required more than just building restaurants. “We had to create a learning organization that could produce managers and business
e China’s currency was the yuan (CNY or RMB). On October 4, 2010, RMB 6.69121 = US$ 1.00.
For the exclusive use of , 2019.
511-040 Yum! China
8
leaders as well as products,” explained Su. “In order to keep growing, we must develop talent at the same time as we build the brand. We can’t teach this in a classroom.” He continued:
Our challenge is to make the best decisions that we can make, then to execute the hell out of them. I believe in a collaborative approach. I choose people who have humility, people who want to learn, discuss, delegate, and have commitment. There’s no room for ego. China doesn’t have the same culture of individualism that is present in the U.S. For example, we have few sports stars. No one says, “Give me the ball, I’ll do it.” In China, we value teamwork, tact, being careful of feelings, and saving “face.” But we do share the U.S. characteristics of passion, drive, and ambition. I believe that some combination of the two cultures is best, and that is what we try to achieve.
A combination of formal training, coaching, and cross-functional committees was used for management development. Su, who was characterized by his team as a patient but demanding boss who asked lots of questions, personally taught a course called “Making Better Decisions.” “How good you are as a leader depends on how good are the decisions that you make,” he explained. “There is a difference between solving problems and making decisions. Some people find it easier to put off decisions, or to defer to leaders or politics. People are their own worst enemies.”
Committees, which included a mix of senior and junior managers, played an important role in training and also in building know-how and spreading it throughout the organization. “Each meeting is a learning process,” said Chu. “We learn from each other, make decisions together, reflect on common goals.” The senior member’s role was mainly to facilitate and often to intercede when Su—if he was present—expressed an opinion. “Junior members may have only been with Yum for a few years or even a few months,” explained Loh. “If Sam objects, they have a natural tendency to defer to him. Most often, he is searching for clarity—pushing us to look beyond the top three ideas to push forward or reasons to say no. That’s part of his coaching process.” Senior managers also used the committees to spot upcoming talent.
“Yum! China’s whole organization is organized around learning,” commented Pelaez. “I’ve been in China for six years and it’s so exciting that I never want to leave. Everything is changing very rapidly and that calls for innovation, flexibility, and fast decision making. When I go back to the U.S., it’s like watching a movie playing in slow motion.”
Marketing
Since KFC’s initial entry into China, it had been positioned as a Western brand. However, KFC leaders had made a conscientious decision to evolve the brand—through product localization and differentiated marketing—to embody Chinese characteristics, unlike many foreign brands that clung to their Western origin. For example, KFC’s marketing targeted family and friends of all ages, while McDonald’s cultivated a trendy “young and hip” image. (See Exhibit 12 for the brand image tracking results on a customer survey.)
In the first 10 years, the primary marketing focus for KFC was on families. KFC introduced special children’s meals and developed a mascot, “Chicky,” which became very popular with kids. Many restaurants had a play area, and hostesses organized activities, such as teaching English songs and rhymes and Western dance, to entertain children while their parents ate. KFC outlets were popular venues for birthday parties, where Chicky (an employee in costume) often made an appearance.
Loh explained that the company’s marketing programs had to evolve, as the first children to experience KFC grew up: “Now those children are teenagers, and we need trendier products to
For the exclusive use of , 2019.
Yum! China 511-040
9
connect with them. In addition, today’s ‘new generation’ kids prefer computer games to costumed mascots and plastic toys. While we still continue our basic kids’ programs, we must be innovative to remain relevant in their lives.”
Once the KFC brand was widely known, marketing was forced to become more sophisticated. KFC faced growing competition from other Western chains, as well as from local restaurants and street vendors and—increasingly—local fast-food chains (see Appendix B for information on competitors in China). “Local food products are readily available and inexpensive,” noted Su, “but with the recent serious food safety incidents, consumers are beginning to question the safety— especially of the street vendors. Food safety has always been a key feature of the KFC offering. An important feature of what we are selling is peace of mind.”
KFC’s marketing team explored different times of the day and different eating occasions. In 2002, some KFCs began opening for breakfast. “Rent is a big part of our operating costs,” noted Loh. “Opening earlier is a way to spread that fixed cost. However, KFC doesn’t serve breakfast in the U.S., so we needed to invent a breakfast menu.” It developed a list of possible breakfast items based on market research. “Sam asked about congee, a traditional rice-based breakfast dish,” recalled Loh. “It wasn’t on our list. We had asked people what they ate for breakfast, not what they would like to eat. It turned out that congee was hard to make at home and not many shops sold it. We created a system, using our existing cooking equipment, to freshly prepare congee in the restaurant overnight. Now it’s our number-one seller at breakfast.”
Su noted that the company’s experience with congee demonstrated that KFC, even though it was a Western brand, could be “stretched” enough to cover traditional Chinese dishes. This opened up more menu options. “The congee story also points out that simply conducting market research and gathering consumer data are not enough,” said Loh. “It’s not the same thing as know-how. You must have the ability to ask the right questions. That’s where our own backgrounds come in.”
Sourcing and Logistics
Yum sourced products from 500 to 600 suppliers. Following the company’s policy to purchase as much as possible in China, in 2010 it bought everything from chicken to lettuce to paper goods locally except for cheese (China’s dairy sector was still in its infancy); one-half of the potatoes it used (Yum was working with McCain’s in northern China to increase supply); frozen corn on the cob (sweet corn was not grown in China, so Yum was working to introduce U.S. varieties); chicken wings (partially sourced from Brazil due to limited supply in China); and a few specialty items, such as Tabasco sauce.
Yum preferred to work with vertically integrated suppliers whenever possible. “Food production in China is still highly variable,” explained Pelaez. “Some suppliers are best in class, but many others are not. We work all the way back through the system to the farmer, and even before—with the animal feed companies and other input suppliers—to ensure that our products are safe.” Pelaez explained the challenge of sourcing safe milk:
The dairy industry here is very fragmented. Many farmers raise no more than a dozen cows and transfer their milk to collection points by bicycles or other forms of transportation twice every day. The dairy company that we work with in Northern China takes the temperature of every can of milk that is delivered. Milk fresh from the cow is warm, so cold milk is not accepted. They also conduct a rapid test on every can to make sure that the milk has not been adulterated. A small sample of every jug is retained, as well as one for every collection tank
For the exclusive use of , 2019.
511-040 Yum! China
10
and truck before it goes to the factory. The truck is tested again at the factory to make sure it has the right proteins and chemical composition.
Yum actively promoted food safety and the adoption of best practices, including risk-based management processes, for all Chinese food companies—not just their own suppliers. “We are recognized by the government as being the leader in food safety,” commented Pelaez. “They hold us up as an example in the industry.” When China’s new food safety laws were being written, Yum pushed hard to make sure the government took the needs of the food service industry, as well as packaged goods manufacturers, into consideration. “The new Chinese food safety law has a solid scientific base and has taken into account many of the best practices,” noted Pelaez. “The rest of the world should be very impressed. Still, full implementation will take some time.”
One of the most important jobs of the sourcing group was to create capacity. “The number-one challenge is to keep up with the growth that we have planned, to create enough supply capability to get the business needs fully covered,” noted Pelaez. “Last year, we signed three-year purchase orders for a total of RMB [renminbi] 5 billion (about $750 million) with our three main poultry suppliers. This was to encourage them to backwards integrate into chicken raising and to guarantee supply. We want to encourage the highest quality suppliers to invest. In the meantime, we also encourage competition. We think this is better for us and for the industry.”
In addition to strong sourcing capabilities, Yum was acknowledged as having the most advanced and integrated cold-chain system in China. “Yum’s distribution system in China is second only to the Chinese Army’s, allowing Yum to open stores in provinces and cities McDonald’s may not reach for
10 years,” wrote one analyst in a 2007 report.1 In 2010, Yum’s distribution network consisted of 11 full-service logistics centers (activities included inventory management, customer service, transport, and warehouse management) and six satellite centers (warehouse management and transport only). The largest centers were in Beijing and Shanghai. Satellite centers were set up to support remote areas. For example, supplies for Xinjiang—which was several days’ drive from the coast—were consolidated in Xian and sent to Xinjiang by train. (See Exhibit 13 for a map of Yum’s distribution network.)
The logistics centers received restaurant orders via e-mail. In urban areas, restaurant deliveries were made at night, when the crowded city streets were quieter. Trucks, which were smaller than U.S. trucks in order to navigate tight areas, were divided into three compartments: one for dry products, one for refrigerated products, and one for frozen products. Each truck could deliver to six to nine stores a night. Each restaurant received three to four deliveries a week.
In China, the condition of the roads worsened during the winters, when traffic jams could extend for miles. Yum developed contingency plans for these situations, including renting temporary warehouses in some provinces to store goods. It also adopted this plan in cyclone-prone provinces. Other contingency plans included reserving space on cargo airlines to allow supplies to be airlifted if needed.
In 2008, Yum reorganized its logistics operations into a separate company and brought in Roland Chong, an experienced transportation executive from Yellow Freight China, to run it. “The new structure makes it easier to focus on costs,” explained Pelaez.
Store Development
Yum’s 450-person development team maintained a large portfolio of potential restaurant sites, which were reviewed two times per year. Once the team approved a project, it negotiated a lease
For the exclusive use of , 2019.
Yum! China 511-040
11
(usually 10 to 15 years) and began construction (usually build-out of an interior space). It took about four to six months to develop a new restaurant from site identification to opening, which was about half the time required in the U.S. or other countries. “China is very dynamic,” commented Chu. “Here, a building can pop up almost overnight. Look at how fast the government can build a high- speed highway.” (See Exhibit 14 for more information on the store development process.)
The cost to build a new store was around RMB 4 million (approx. $0.6 million), which was well below that in the U.S. Turnover per unit was about $1.4 million for KFC (compared to $1.0 million in the U.S.) and $1.1 million for Pizza Hut. Restaurant margins were over 20% for company-owned restaurants, and Yum received around 6% royalty from franchise restaurants.
Store Operations
Store-level performance was all about execution and consistency over hundreds of thousands of individual customer interactions a year. Products and customer service had to be perfect, day after day, store after store, to build and protect the brand. Yum’s operations group also had to make sure that trained staff was available for new restaurants the moment they were ready to open. “If we want to build here, we must really concentrate on people,” said Chu. “We must have the systems and the processes in place that enable execution and growth.”
Restaurant general managers (RGMs) managed the store’s front end (serving customers) and back end (producing fresh and safe food), as well as overseeing the ordering of supplies, equipment maintenance, and scheduling staff. Since each restaurant was a training site, RGMs also needed to have the skills to train others. Yum recruited management trainees, who were usually college graduates. The training to become an RGM took from two to four years, during which time candidates learned every job in the restaurant. “Compared to the U.S., there’s a lot to learn because there are so many products under each brand,” explained Chu. “We have a big team to design the training materials. It’s a combination of technology, videos, online training, and simulation.”
Most crew members (restaurant staff) were part-time employees. Crew members were often college students, although this varied by city. Chu noted that having so many young college students was a necessity but that it was also a major challenge to understand how to integrate them. Chu also explained that Yum had to convince parents to allow their children to work part-time:
In China, it’s a new experience for a young person or college student to have a part-time job. There are a lot of one-child families. This means they have less interaction with people while they are growing up. They spend a lot of time on the computer, which is not the best preparation to enter society. Parents must trust us and see that we offer a healthy, safe environment. A part-time job with Yum is a way to begin to learn people-relation skills, teamwork, how to enjoy team achievements and to celebrate with other people. Even if someone works for us for only three months, that’s an opportunity to teach them something and also turn them into customers for life.
All restaurant staff members were trained extensively in Western service standards and the way restaurants functioned. “We also take extreme steps to make sure that our restaurants serve safe food,” noted Pelaez. “We have standardized operations and hygiene practices. Everything about how to handle food is spelled out. We even train people on personal hygiene—every detail about their dress, their hair, how often they must wash their hands.”
Qun Wang Jamieson, vice president of public affairs and government relations, noted that Yum had played a tremendous role in bringing Western-style customer service to China: “KFC was one of
For the exclusive use of , 2019.
511-040 Yum! China
12
the early developers of the customer service concept. This was big change in a culture transitioning from one with no consumer rights. Under communism, no one cared about the individual. Everyone looked at what we were doing at KFC and tried to emulate us. Today you will see many restaurants and shops in the big cities with great customer service.”
New Product Development
Yum! China had a very aggressive program for new product development compared to its counterparts in the U.S. “We must push harder because Chinese consumers enjoy and expect variety,” commented Pelaez. “As a division, we introduce between 85 and 100 new products in a year, compared to one or two in the U.S.” Yum often introduced new products as special promotions; the ones that performed the best might become permanent menu items or be brought back again.
New product development was done by committee, with one committee for each restaurant brand (KFC, Pizza Hut, and East Dawning, a Chinese fast-food brand that was in the pilot stage). Each committee included different functions, such as marketing (to make sure customers liked the product), operations (to make sure it could be produced in the restaurant), supply chain (to make sure it could be procured for 3,000-plus restaurants), and product safety (to make sure that product specifications complied with the law before they went to suppliers). Su was a member of all product development committees.
Over time, long-tenured Yum managers had built a deep understanding of consumer tastes by grappling with questions such as: “What type of chicken should we sell?” (Chinese preferred dark meat to white.) “What type of breads work best?” (Chinese preferred soft breads to hard or crusty breads.) “What does it mean for something to be ‘hot’?” (Sichuan spices were felt in the front of the mouth, in contrast to U.S. black-pepper-based spices that were felt in the back of the throat.) “We are looking to add curry dishes,” explained Pelaez. “We must dive deep to find the right options for our customers. What curry flavors do Chinese people like? We can’t rely on chemical analysis alone. We developed a sensory profile, gave it to our suppliers, and asked them to develop a recipe, then trained our tasting panel—made up of local people—to taste curry.” He continued:
Everyone thinks that innovation is unique to the U.S. But even though a lot of people talk about it there, few people actually do it. Everything we do in China is about innovation and learning. Building a business here is much more than just coming up with a new sandwich or pizza. It’s about thinking about the long-term future that we want to achieve, then taking the steps now to create it. We are empowered as an organization to really search for the best answer for China. Everyone in the company is engaged in this process. Nowhere else does the very top management in the company spend three days every month discussing innovation. We have developed a process, the discipline, and the mind-set to constantly challenge ourselves.
The Future
In October 2010, Su had good reason to be bullish about the prospects for his company. China was an exciting place to be. The economy was expanding faster than in the West. China’s middle class— now estimated at over 300 million—was expected to reach 800 million by 2025. Expats and young, well-educated, foreign-born Chinese were returning in droves to help build new businesses. But one aspect continued to worry him:
For the exclusive use of , 2019.
Yum! China 511-040
13
I am reminded of a question I received at a seminar in the U.S. in the mid-1990s. A fellow participant asked, “Why do you want to bring junk food to China?” This started me thinking about what our brand is going to be. Two issues in particular have been on my mind: how do people decide what to eat, and why is McDonald’s so closely associated with the obesity problem in the U.S.?
Regarding individual food decisions, Su believed that the Chinese had a good tradition of always eating a large variety of ingredients, but in modern days had developed new issues. Dietary changes included a significant decrease in carbohydrate intake, too many calories from fat, more protein,f and fewer vegetables. This was compounded by a reduction in physical activity as the country added cars instead of bikes, and elevators instead of stairs.
On the link between fast food and obesity, Su believed that food companies and restaurant chains had not done enough: “The traditional fast- food model is based on selling high volumes of a very limited variety of items. Consumers are urged to eat the same thing over and over. That’s simpler to make in the back, but not a balanced diet. Look at those huge cups for soft drinks in the U.S. We have been too greedy, too short-sighted.”
Su had good reason to be concerned. A comprehensive study conducted in 2002 by the China Academy of Medical Science found that 22.8% of Chinese adults were overweight (up from 6% in 1982), while 7.1% were clinically obese (60 million). By 2005, the number of obese had increased to
between 70 and 90 million—one-third of the total number of obese people worldwide.2 The situation for children was more alarming. Under the one-child policy, many Chinese children were pampered by parents and grandparents, who often encouraged children to eat more than necessary. According to the 2009 Chinese Child Nutrition and Health Report, “the number of overweight and obese children in China reached 12 million, accounting for one-third of the world’s fat kids” and “the rate of overweight and obesity among children seven to 17 years of age had tripled to 8.1% in the past 10
years.”3
Wanting to be proactive, in 2005 Su developed a “New Fast Food” concept that emphasized variety, quality, taste, cooking platform, and eating occasion. This new concept could be summarized in 24 Chinese characters: delicious and safe, high quality and fast, nutritious and balanced, healthy living, and rooted in China.
Yum’s menu, which already included a variety of dishes, was expanded even more. “We must lead by example,” stated Su. “We can’t stick with a simple menu. This adds more complexity compared to the traditional QSR [quick-serve restaurant] model. While we are Kentucky Fried Chicken, we’ve added oven-roasted chicken, sandwiches, wraps, and different proteins such as fish, shrimp, and beef. We have developed more vegetable dishes that are attractive to Chinese people. We are telling our consumers that a balanced meal, a variety of foods, and moderation are most important, rather than pushing them to eat more chicken.”
KFC eliminated “super-size” items and only offered a small savings on a “combo” (24 yuan for a meal, which included French fries and a drink, compared to 26 yuan if ordered separately). Children’s meals were served with vegetables and juice, although fries and a soda could be substituted upon request. KFC designed tray mats with educational messages and printed nutrition information on every package. Hostesses taught lessons on nutrition to kids.
f Between 1982 and 2002, Chinese daily per capita meat intake almost doubled in urban areas and tripled in rural areas. Dairy and egg consumption had also increased more than threefold.
For the exclusive use of , 2019.
511-040 Yum! China
14
Yum began a grassroots effort to promote physical activity. It popularized a slogan: “Exercise every day makes you healthy your whole life.” For boys, Yum developed youth basketball competitions, which by 2010 had grown to over 260,000 participants in 438 cities. For girls, Yum sponsored gymnastic dance programs in the schools.
On a broader level, Yum lobbied the government to take obesity seriously and pushed government officials to be more aggressive in promoting education. Yum’s marketing group worked on nutrition campaigns through the Ministry of Health and sent Chicky to schools to speak on the subject. Additionally, Yum set up a foundation and gave grants to research projects that studied health issues related to restaurant foods and urban living.
Yum also presented the New Fast Food proposal to the entire Chinese restaurant industry via a white paper and a presentation to the Chinese industry association, where Su had urged his industry compatriots to join in by appealing to their patriotism. “It’s good for China if people have faith in the restaurant industry,” he explained. “However, 99% of the food industry in China is local. Their major concern is to expand as quickly as possible. Many have dreams of an IPO. They don’t care about serving healthy food.”
But was this all a distraction at a time when Yum was expanding so frenetically? Would Su’s attempts to position KFC as a healthy place to eat undermine the simple proposition that had served his company so well? Had he in fact learned the right lessons from the American fast-food experience? Or had he identified the model that the rest of the world should adopt? Su thought that China could easily accommodate another 15,000 of his stores. Did he have the right concept with which to go forward?
For the exclusive use of , 2019.
Yum! China 511-040
15
Exhibit 1 Background on Yum! Brands
Yum! Brands started when three of its five brands were spun off from PepsiCo, which had entered the restaurant business with the acquisitions of Pizza Hut and Taco Bell in the 1970s and KFC in 1986. PepsiCo had grown these brands significantly and brought them into many international markets. Under PepsiCo, each business stood on its own, responsible for hitting certain financial targets. PepsiCo management rarely became involved in how those targets were met. One manager recalled, “You only saw PepsiCo twice a year, once during the annual planning review and once during the people plan review. If you saw them more than that you were in trouble.”
In the mid-1990s, however, PepsiCo’s overall performance and the performance of its restaurants began to slip. In 1997, PepsiCo spun off the restaurant business—KFC, Pizza Hut, and Taco Bell—in order to concentrate its efforts on its beverage and snack foods businesses. The three restaurant brands became Tricon Global Restaurants, Inc., an independent, publicly traded company. In 2002, Tricon acquired Long John Silver’s (a quick-serve seafood chain) and A&W All-American Foods (known for root beer floats, hot dogs, and hamburgers), and renamed itself Yum! Brands, Inc., to reflect its expanding portfolio of brands and its ticker symbol on the New York Stock Exchange (NYSE: YUM).
By 2010, Yum was ranked #216 on the Fortune 500 List, with nearly $11 billion in revenue in 2009. Four of Yum’s restaurant brands—KFC, Pizza Hut, Taco Bell, and Long John Silver’s—were the global leaders in the chicken, pizza, Mexican-style food, and quick-service seafood categories (see descriptions below). Yum also operated A&W and WingStreet, created in 2003 as a delivery-based chicken wing chain usually located inside a Pizza Hut. The company had built a number of “multibrand” units that combined two or more brands under one roof.
Yum Restaurant Brands
KFC KFC Corporation, based in Louisville, Kentucky, began in 1952 when Colonel Harland Sanders sold the first franchise to produce his fried chicken recipe based on a secret blend of 11 herbs and spices. Often sold by the bucket rather than as individual servings, Kentucky Fried Chicken was the first fast-food product designed for take-out rather than to be eaten in the restaurant. In 1964, Sanders sold KFC to an investor group led by John Y. Brown Jr., who built it into a national chain of 3,500 franchised and company-owned units before it was sold to Heublein Inc. in 1971. PepsiCo acquired KFC from RJ Reynolds (which had acquired Heublein in 1982) in 1986.
By 2010, KFC was the world’s largest chicken restaurant chain, with more than 14,000 outlets (5,300 in the U.S.) serving more than 12 million customers daily. KFC’s traditional menu offerings of “Original Recipe” or “Extra Crispy” fried (bone-in) chicken meals served with side dishes such as coleslaw, mashed potatoes and gravy, corn on the cob, and a biscuit, had been supplemented with new products such as crispy chicken strips, popcorn chicken, bone-in or boneless wings, and several different chicken sandwiches. KFC introduced grilled chicken in 2009.
Long John Silver’s Long John Silver’s, Inc., based in Louisville, Kentucky, was the world’s largest quick-service seafood chain with more than 1,200 Long John Silver’s restaurants worldwide and over 200 additional points of distribution in Yum! Brands multibrand restaurants. The menu included batter-dipped fish, chicken, and shrimp, along with fries, coleslaw, and hush puppies. Yum! Brands acquired Long John Silver’s, which was founded in 1969, in 2002.
For the exclusive use of , 2019.
511-040 Yum! China
16
Pizza Hut Based in Dallas, Texas, Pizza Hut, Inc., was the world’s largest pizza restaurant company with more than 7,500 Pizza Hut restaurants in the U.S. and over 5,600 in 97 countries and territories. Pizza Hut offered a wide range of pizzas with different toppings and crusts. Pizza Hut also offered a selection of chicken wings and in 2008 introduced two family-sized (four servings) pasta dishes. The first Pizza Hut opened in Wichita, Kansas, in 1958 and the first international location was opened in 1972. The chain was acquired by PepsiCo in 1977.
Taco Bell Taco Bell Corp., based in Irvine, California, was the leading U.S. Mexican-style quick-serve restaurant chain serving tacos, burritos, quesadillas, nachos, taco salads, and other specialty items. The first Taco Bell was opened in California in 1962 by founder Glen Bell. Bell sold the chain to PepsiCo in 1978 and. In 2010, there were 5,600 Taco Bells in the U.S., and the chain was the second most profitable U.S. QSR brand, with a 54% share of the Mexican QSR category.
Source: Some material in this section is drawn from Frances Frei, Amy Edmonson, and Jim Weber, “Yum! Brands, Inc: A Corporate Do-Over,” HBS No. 606-041 (Boston: Harvard Business School Publishing, 2006). The rest was compiled from company documents.
For the exclusive use of , 2019.
Yum! China 511-040
17
Exhibit 2 Yum! Brands Selected Financial Data (in $ millions, except per share and unit amounts)
2009 2008 2007 2006 2005
Summary of Operations
Revenues
Company sales $9,413 $9,843 $9,100 $8,365 $8,225
Franchise and license fees and income 1,423 1,461 1,316 1,196 1,124
Total 10,836 11,304 10,416 9,561 9,349
Closures and impairment income (expenses) (103) (43) (35) (59) (62)
Refranchising gain (loss) 26 5 11 24 43
Operating profit 1,590 1,517 1,356 1,262 1,153
Interest expense, net 194 226 166 154 127
Income before income taxes 1,396 1,291 1,191 1,108 1,026
Net income—including noncontrolling interest 1,083 972 909 824 762
Net income—Yum! Brands, Inc. 1,071 964 909 824 762
Basic earnings per common share 2.28 2.03 1.74 1.51 1.33
Diluted earnings per common share 2.22 1.96 1.68 1.46 1.28
Diluted earnings per common share before special items 2.17 1.91 1.68 1.46 1.27
Cash Flow Data
Provided by operating activities $1,404 $1,521 $1,551 $1,257 $1,233
Capital spending, excluding acquisitions 797 935 726 572 609
Proceeds from refranchising of restaurants 194 266 117 257 145
Repurchase shares of common stock — 1,628 1,410 983 1,056
Dividends paid on common stock 362 322 273 144 123
Balance Sheet
Total assets $7,148 $6,527 $7,242 $6,368 $5,797
Long-term debt 3,207 3,564 2,924 2,045 1,649
Total debt 3,266 3,589 3,212 2,272 1,806
Other Data
Number of stores at year-end
Company 7,666 7,568 7,625 7,736 7,587
Unconsolidated affiliates 469 645 1,314 1,206 1,648
Franchisees 26,745 25,911 24,297 23,516 22,666
Licensees 2,200 2,168 2,109 2,137 2,376
System 37,080 36,292 35,345 34,595 34,277
U.S. same-store sales growth (5%) 2% — 1% 3%
YRI system sales growth
Reported (3%) 10% 15% 7% 9%
Local currency 5% 8% 10% 7% 6%
China division system sales growth
Reported 10% 31% 31% 26% 13%
Local currency 9% 20% 24% 23% 11%
Shares outstanding at year-end 469 459 499 530 556
Cash dividends declared per common stock $0.80 $0.72 $0.45 $0.43 $0.22
Market price per share at year-end $35.38 $30.28 $38.54 $29.40 $23.44
Source: Yum! 2009 Annual Report.
For the exclusive use of , 2019.
511-040 Yum! China
18
Exhibit 3 Yum! Brands Consolidated Statements of Income (in $ millions except per share amounts)
Revenue 2009 2008 2007
Company sales $9,413 $9,843 $9,100
Franchise and license fees 1,423 1,461 1,335
Total revenues 10,836 11,304 10,435
Cost and Expenses, net
Company restaurants
Food and paper 3,003 3,239 2,824
Payroll and employee benefits 2,154 2,370 2,305
Occupancy and other operating expenses 2,777 2,856 2,644
Company restaurant expenses 7,934 8,465 7,773
General and administrative expenses 1,221 1,342 1,293
Franchise and license expenses 118 99 59
Closures and impairment (income) expenses 103 43 35
Refranchising (gain) loss (26) (5) (11)
Other (income) expense (104) (157) (71)
Total costs and expenses, net 9,246 9,787 9,078
Operating profit 1,590 1,517 1,357
Interest expense, net 194 226 166
Income before Income Taxes 1,396 1,291 1,191
Income tax provision 313 319 282
Net income—including noncontrolling interest 1,083 972 909
Net income—noncontrolling interest 12 8 —
Net Income 1,071 964 909
Basic earnings per common share 2.28 2.03 1.74
Diluted earnings per common share 2.22 1.96 1.68
Dividends declared per common share 0.8 0.72 0.45
Source: Yum! 2009 Annual Report.
For the exclusive use of , 2019.
Yum! China 511-040
19
Exhibit 4 Yum Revenues and Operating Profits by Area, 1998 through Third Quarter, 2010 ($ millions)
Source: Adapted from company data.
–
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1998 2002 2007 2008 2009 Thru Q3 2010
$ m
ill io
n s
Yum Revenues
China
International
U.S.
0
100
200
300
400
500
600
700
800
900
1998 2002 2007 2008 2009 Thru Q3 2010
$ m
ill io
n s
Yum Operating Profits
China
International
U.S.
For the exclusive use of , 2019.
5 11
-0 40
-2 0
–
E x
h ib
it 5
a Y
u m
F in
a n
ci al
s b
y A
re a
: C h
in a
( d
a ta
f ro
m t
h ir
d -q
u ar
te r
2 0
1 0
e a
rn in
g s
re le
a se
)
1 99
8 2
00 2
2 00
7 2
00 8
( f)
2
00 9
( f)
2
01 0
F Y
F
Y
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
Q 1
Q 2
Q 3
Q 4
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
C o
m p a
n y s
a le
s
$ 1 7 2
$ 5 1 1
$ 1
,8 2
3
$ 4 6 0
$ 6 1 1
$ 7 8 4
$ 9 2 1
$ 2
,7 7
6
$ 5 5 7
$ 7 1 4
$ 9 8 0
$ 1
,1 0
1
$ 3
,3 5
2
$ 6 9 8
$ 8 7 5
$ 1
,1 7
2
$ 2
,7 4
5
F ra
n c h is
e a
n d l ic
e n s e f e
e s a
n d i n c o m
e
8
2 0
6 4
1 1
1 4
1 9
2 0
6 4
1 2
1 4
1 4
1 5
5 5
1 0
1 2
1 6
3 8
R e v e
n u
e s
1 8 0
5 3 1
1 ,8
8 7
4 7 1
6 2 5
8 0 3
9 4 1
2 ,8
4 0
5 6 9
7 2 8
9 9 4
1 ,1
1 6
3 ,4
0 7
7 0 8
8 8 7
1 ,1
8 8
—
2 ,7
8 3
F o
o d
a n
d p
a p e
r
7 3
2 0 7
6 6 7
1 7 3
2 3 1
2 9 5
3 5 0
1 ,0
4 9
2 0 1
2 5 4
3 4 1
3 7 9
1 ,1
7 5
2 2 9
2 9 0
3 9 0
9 0 9
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
1 3
4 1
2 2 1
5 9
8 5
9 2
1 2 8
3 6 4
6 8
1 0 2
1 1 6
1 6 1
4 4 7
9 0
1 3 1
1 5 1
3 7 2
O c c u
p a
n c y a
n d
o th
e r
o p
e ra
ti n
g e
x p e
n s e s
6 0
1 4 8
5 4 3
1 2 6
1 8 6
2 2 6
2 8 9
8 2 7
1 5 4
2 2 6
2 8 6
3 5 9
1 ,0
2 5
1 9 3
2 7 8
3 3 5
8 0 6
C o
m p a
n y r
e s ta
u ra
n t e
x p
e n s e s
1 4 6
3 9 6
1 ,4
3 1
3 5 8
5 0 2
6 1 3
7 6 7
2 ,2
4 0
4 2 3
5 8 2
7 4 3
8 9 9
2 ,6
4 7
5 1 2
6 9 9
8 7 6
—
2 ,0
8 7
G e
n e
ra l a
n d a
d m
in is
tr a ti v e e
x p
e n
s e s
3 0
3 9
1 2 8
2 4
4 4
3 9
5 8
1 6 5
2 7
4 5
4 5
7 1
1 8 8
3 0
5 1
5 5
1 3 6
F ra
n c h is
e a
n d l ic
e n s e e
x p
e n s e s
—
—
– —
—
—
—
—
—
—
—
—
—
—
—
1
1
C lo
s u
re s a
n d
i m
p a
ir m
e n
t e
x p
e n
s e
s
1
3
5
—
—
1
3
4
1
3
2
3
9
—
5
—
5
O th
e r
(i n c o m
e )
e x p
e n
s e
(5 )
(1 6
) (4
8 )
(1 0
) (9
) (1
3 )
(8 )
(4 0
) (1
0 )
(7 )
(1 2
) (4
) (3
3 )
(1 0
) (7
) (1
1 )
(2 8
)
1 7 2
4 2 2
1 ,5
1 6
3 7 2
5 3 7
6 4 0
8 2 0
2 ,3
6 9
4 4 1
6 2 3
7 7 8
9 6 9
2 ,8
1 1
5 3 2
7 4 8
9 2 1
—
2 ,2
0 1
O p
e ra
ti n g
p ro
fi t
$ 8
$ 1 0 9
$ 3 7 1
$ 9 9
$ 8 8
$ 1 6 3
$ 1 2 1
$ 4 7 1
$ 1 2 8
$ 1 0 5
$ 2 1 6
$ 1 4 7
$ 5 9 6
$ 1 7 6
$ 1 3 9
$ 2 6 7
$ —
$ 5 8 2
O p
e ra
ti n g
p ro
fi t g
ro w
th
L o
c a l c u
rr e
n c y
—
—
—
2 3 %
2 6 %
8 %
1 0 %
1 7 %
2 4 %
1 5 %
3 2 %
2 1 %
2 4 %
3 7 %
3 3 %
2 3 %
2 9 %
U .S
. d o
lla rs
—
—
—
3 6 %
4 2 %
2 2 %
2 0 %
2 9 %
3 0 %
1 8 %
3 2 %
2 2 %
2 6 %
3 7 %
3 3 %
2 4 %
3 0 %
C o
m p a
n y s
a le
s
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
F o
o d
a n
d p
a p e
r
4 2
.4
4 0
.5
3 6
.6
3 7
.6
3 7
.8
3 7
.5
3 8
.1
3 7
.8
3 6
.0
3 5
.6
3 4
.8
3 4
.5
3 5
.1
3 2
.9
3 3
.1
3 3
.3
3 3
.1
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
7
.6
8 .0
1
2 .1
1
2 .9
1
3 .8
1
1 .8
1
3 .8
1
3 .1
1
2 .3
1
4 .2
1
1 .7
1
4 .7
1
3 .3
1
2 .9
1
4 .9
1
2 .9
1 3
.6
O c c u
p a
n c y &
o th
e r
o p
e ra
ti n g
e x p e
n s e s
3 5
.0
2 9
.1
2 9
.9
2 7
.3
3 0
.7
2 8
.7
3 1
.3
2 9
.8
2 7
.6
3 1
.7
2 9
.2
3 2
.5
3 0
.6
2 7
.6
3 1
.8
2 8
.6
2 9
.3
R e
s ta
u ra
n t m
a rg
in
1 5
.0 %
2
2 .4
%
2 1
.4 %
2
2 .2
%
1 7
.7 %
2
2 .0
%
1 6
.8 %
1
9 .3
%
2 4
.1 %
1
8 .5
%
2 4
.3 %
1
8 .3
%
2 1
.0 %
2
6 .6
%
2 0
.2 %
2
5 .2
%
2 4
.0 %
C o
m p a
n y s
a le
s
$ 1 7 2
$ 5 1 1
$ 1
,8 2
3
$ 4 6 0
$ 6 1 1
$ 7 8 4
$ 9 2 1
$ 2
,7 7
6
$ 5 5 7
$ 7 1 4
$ 9 8 0
$ 1
,1 0
1
$ 3
,3 5
2
$ 6 9 8
$ 8 7 5
$ 1
,1 7
2
$ 2
,7 4
5
F ra
n c h is
e e
s a le
s
1 7 1
3 5 3
1 ,0
2 0
1 7 3
2 2 6
2 8 8
3 1 6
1 ,0
0 3
1 9 3
2 1 2
2 2 1
2 3 3
8 5 9
1 6 2
1 8 7
2 5 3
6 0 2
M a
in la
n d C
h in
a s
a m
e -s
to re
s a le
s
—
—
1 2 %
1 2 %
1 4 %
5 %
1 %
7 %
2 %
(4
)%
0 %
(3
)%
(1 )%
4 %
4 %
6 %
5 %
S y s te
m s
a le
s g
ro w
th
L o
c a l c u
rr e
n c y
—
—
2 8 %
3 0 %
3 0 %
2 0 %
1 5 %
2 2 %
1 2 %
8 %
1 1 %
8 %
1 0 %
1 5 %
1 5 %
1 8 %
1 6 %
U .S
. d o
lla rs
—
—
3 4 %
4 0 %
4 3 %
3 2 %
2 5 %
3 3 %
1 8 %
1 1 %
1 2 %
8 %
1 1 %
1 5 %
1 5 %
1 9 %
1 6 %
T ra
d it io
n a
l g ro
s s n
e w
r e
s ta
u ra
n t
o p e n
in g s
1 2 0
2 6 2
4 7 1
8 8
9 5
1 2 3
1 9 8
5 0 4
9 8
1 1 8
8 8
2 0 5
5 0 9
9 6
5 9
9 0
2 4 5
T ra
d it io
n a
l n e t
u n
it g
ro w
th
(2 2
) 2 5 9
4 3 7
8 2
8 6
1 1 4
1 7 3
4 5 5
9 0
1 0 5
7 3
1 7 2
4 4 0
9 1
4 6
7 4
2 1 1
T ra
d it io
n a
l n e t
u n
it g
ro w
th %
-6
%
4 2 %
2 1 %
3 %
3 %
4 %
6 %
1 8 %
3 %
3 %
2 %
5 %
1 5 %
3 %
1 %
2 %
6 %
S o
u rc
e:
C o
m p
a n
y d
o cu
m en
ts .
For the exclusive use of , 2019.
5 11
-0 40
-2 1
–
E x
h ib
it 5
b Y
u m
F in
a n
ci a
ls b
y A
re a
: I n
te rn
a ti
o n
a l
(d a
ta f
ro m
t h
ir d
-q u
ar te
r ea
rn in
g s
re le
a se
)
1 99
8 2
00 2
2 00
7 2
00 8
( f)
2
00 9
( f)
2
01 0
F Y
F
Y
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
Q 1
Q 2
Q 3
Q 4
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
C o
m p a
n y s
a le
s
$ 1
,6 6
7
$ 1
,6 0
2
$ 2
,7 5
9
$ 6 0 0
$ 6 5 3
$ 6 5 8
$ 7 4 6
$ 2
,6 5
7
$ 4 7 9
$ 5 1 5
$ 5 7 3
$ 7 5 6
$ 2
,3 2
3
$ 5 3 5
$ 5 3 4
$ 5 3 3
$ 1
,6 0
2
F ra
n c h is
e a
n d l ic
e n s e f e
e s a
n d i n c o m
e
1 9 3
2 7 7
5 8 7
1 5 0
1 5 5
1 6 6
2 0 4
6 7 5
1 5 0
1 3 8
1 5 7
2 2 0
6 6 5
1 6 9
1 5 9
1 7 1
4 9 9
R e v e
n u
e s
1 ,8
6 0
1 ,8
7 9
3 ,3
4 6
7 5 0
8 0 8
8 2 4
9 5 0
3 ,3
3 2
6 2 9
6 5 3
7 3 0
9 7 6
2 ,9
8 8
7 0 4
6 9 3
7 0 4
—
2 ,1
0 1
F o
o d
a n
d p
a p e
r 5 8 7
5 5 6
8 4 0
1 8 7
2 1 1
2 1 1
2 4 6
8 5 5
1 5 7
1 6 8
1 8 8
2 4 5
7 5 8
1 7 4
1 7 2
1 7 0
5 1 6
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
4 0 2
3 5 5
7 0 7
1 5 2
1 6 7
1 6 9
1 8 9
6 7 7
1 1 9
1 3 0
1 4 4
1 9 3
5 8 6
1 3 4
1 3 7
1 3 3
4 0 4
O c c u
p a
n c y a
n d
o th
e r
o p
e ra
ti n
g e
x p e
n s e s
4 6 6
4 6 9
8 8 0
1 8 3
2 0 5
2 0 4
2 4 2
8 3 4
1 4 6
1 6 0
1 7 7
2 4 1
7 2 4
1 6 6
1 6 9
1 6 3
4 9 8
C o
m p a
n y r
e s ta
u ra
n t e
x p
e n s e s
1 ,4
5 5
1 ,3
8 0
2 ,4
2 7
5 2 2
5 8 3
5 8 4
6 7 7
2 ,3
6 6
4 2 2
4 5 8
5 0 9
6 7 9
2 ,0
6 8
4 7 4
4 7 8
4 6 6
—
1 ,4
1 8
G e
n e
ra l a
n d a
d m
in is
tr a ti v e e
x p
e n
s e s
2 3 6
2 2 7
4 0 4
8 0
9 4
9 3
1 2 5
3 9 2
7 2
8 2
8 9
1 1 9
3 6 2
7 8
8 6
8 4
2 4 8
F ra
n c h is
e a
n d l ic
e n s e e
x p
e n s e s
—
1 0
2 5
8
7
1 0
1 0
3 5
8
8
1 3
1 0
3 9
9
6
9
2 4
C lo
s u
re s a
n d
i m
p a
ir m
e n
t e
x p
e n
s e
s
(1 6
) 2 5
1 6
(1 )
2
(2 )
1 0
9
1
5
(1 )
1 7
2 2
2
1
3
6
O th
e r
(i n c o m
e )
e x p
e n
s e
(1 3
) (1
5 )
(4 )
(1 )
—
—
—
(1 )
—
—
—
—
—
—
—
—
–
1 ,6
6 2
1 ,6
2 7
2 ,8
6 8
6 0 8
6 8 6
6 8 5
8 2 2
2 ,8
0 1
5 0 3
5 5 3
6 1 0
8 2 5
2 ,4
9 1
5 6 3
5 7 1
5 6 2
—
1 ,6
9 6
O p
e ra
ti n g
p ro
fi t
$ 1 9 8
$ 2 5 2
$ 4 7 8
$ 1 4 2
$ 1 2 2
$ 1 3 9
$ 1 2 8
$ 5 3 1
$ 1 2 6
$ 1 0 0
$ 1 2 0
$ 1 5 1
$ 4 9 7
$ 1 4 1
$ 1 2 2
$ 1 4 2
$ —
$ 4 0 5
O p
e ra
ti n g
p ro
fi t g
ro w
th
L o
c a l c u
rr e
n c y
—
—
—
1 1 %
9 %
4 %
7 %
9 %
3 %
3 %
(1
)%
1 2 %
4 %
2 %
7 %
1 6 %
8 %
U .S
. d o
lla rs
—
—
—
1 6 %
1 7 %
8 %
(3
)%
7 %
(1
2 )%
(1
7 )%
(1
3 )%
1 8 %
(6
)%
1 3 %
2 1 %
1 8 %
1 7 %
C o
m p a
n y s
a le
s
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
F o
o d
a n
d p
a p e
r 3
5 .2
3
4 .7
3
0 .4
3
1 .2
3
2 .2
3
2 .3
3
2 .8
3
2 .2
3
2 .8
3
2 .7
3
2 .6
3
2 .4
3
2 .7
3
2 .6
3
2 .2
3
1 .9
3 2
.2
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
2
4 .1
2
2 .2
2
5 .6
2
5 .2
2
5 .8
2
5 .6
2
5 .4
2
5 .5
2
4 .7
2
5 .3
2
5 .5
2
5 .4
2
5 .2
2
5 .0
2
5 .7
2
4 .9
2 5
.2
O c c u
p a
n c y &
o th
e r
o p
e ra
ti n g
e x p e
n s e s
2 8
.0
2 9
.3
3 1
.9
3 0
.6
3 1
.2
3 1
.0
3 2
.6
3 1
.4
3 0
.6
3 0
.9
3 1
.0
3 1
.9
3 1
.2
3 1
.1
3 1
.4
3 0
.7
3
1 .1
R e
s ta
u ra
n t m
a rg
in
1 2
.7 %
1
3 .8
%
1 2
.1 %
1
3 .0
%
1 0
.8 %
1
1 .1
%
9 .2
%
1 0
.9 %
1
1 .9
%
1 1
.1 %
1
0 .9
%
1 0
.3 %
1
0 .9
%
1 1
.3 %
1
0 .7
%
1 2
.5 %
1 1
.5 %
C o
m p a
n y s
a le
s
$ 1
,6 6
7
$ 1
,6 0
2
$ 2
,7 5
9
$ 6 0 0
$ 6 5 3
$ 6 5 8
$ 7 4 6
$ 2
,6 5
7
$ 4 7 9
$ 5 1 5
$ 5 7 3
$ 7 5 6
$ 2
,3 2
3
$ 5 3 5
$ 5 3 4
$ 5 3 3
$
1 ,6
0 2
F ra
n c h is
e e
s a le
s
4 ,5
9 7
5 ,9
1 4
1 0
,1 1
2
2 ,6
1 5
2 ,6
3 3
2 ,8
0 2
3 ,4
4 0
1 1
,4 9
0
2 ,6
4 4
2 ,3
7 3
2 ,6
5 2
3 ,6
5 4
1 1
,3 2
3
2 ,9
0 4
2 ,7
8 5
2 ,9
0 7
8
,5 9 6
S a
m e -s
to re
s a
le s
—
—
—
5 %
4 %
4 %
5 %
4 %
6 %
1 %
0 %
(2
)%
1 %
(2
)%
1 %
1 %
0 %
S y s te
m s
a le
s g
ro w
th
L o
c a l c u
rr e
n c y
—
—
1 0 %
9 %
8 %
7 %
9 %
8 %
1 0 %
5 %
4 %
2 %
5 %
1 %
4 %
5 %
3 %
U .S
. d o
lla rs
—
—
1 5 %
1 5 %
1 5 %
1 2 %
1 %
1 0 %
(3
)%
(1 2
)%
(7 )%
5 %
(4
)%
1 0 %
1 5 %
7 %
1 0 %
T ra
d it io
n a
l g ro
s s n
e w
r e
s ta
u ra
n t
o p e n
in g s
5 4 5
7 8 9
8 8 7
1 6 5
1 7 0
2 2 4
4 3 2
9 9 1
1 5 8
2 1 0
1 7 9
4 1 1
9 5 8
1 0 9
1 7 5
1 9 4
4 7 8
T ra
d it io
n a
l n e t
u n
it g
ro w
th
9 7
3 9 6
4 8 1
1 0 4
9 5
1 3 5
2 8 0
6 1 4
9 3
1 0 4
(2 6
) 3 2 2
4 9 3
3 4
7 3
8 6
1 9 3
T ra
d it io
n a
l n e t
u n
it g
ro w
th %
1 %
6 %
4 %
1 %
1 %
1 %
2 %
5 %
1 %
1 %
0 %
2 %
4 %
0 %
1 %
1 %
1 %
S o
u rc
e:
C o
m p
a n
y d
o cu
m en
ts .
For the exclusive use of , 2019.
5 11
-0 40
-2 2
–
E x
h ib
it 5
c Y
u m
F in
a n
ci a
ls b
y A
re a
: U .S
. ( d
a ta
f ro
m t
h ir
d -q
u ar
te r
2 0
1 0
e a
rn in
g s
re le
a se
)
1 99
7 2
00 2
2 00
7 2
00 8
2 00
9 2
01 0
F Y
F
Y
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
Q 1
Q 2
Q 3
Q 4
F Y
Q
1 Q
2 Q
3 Q
4 F
Y
C o
m p a
n y s
a le
s
$ 6
,9 9
4
$ 4
,7 7
8
$ 4
,5 1
8
$ 1
,0 3
4
$ 1
,0 5
9
$ 1
,0 4
0
$ 1
,2 7
7
$ 4
,4 1
0
$ 8 8 2
$ 9 2 3
$ 8 7 9
$ 1
,0 5
4
$ 3
,7 3
8
$ 7 6 3
$ 8 1 1
$ 7 9 1
$ 2
,3 6
5
F ra
n c h is
e a
n d l ic
e n s e f e
e s a
n d i n c o m
e
3 7 6
5 6 9
6 8 4
1 5 8
1 6 7
1 7 5
2 2 2
7 2 2
1 6 4
1 7 6
1 7 6
2 1 9
7 3 5
1 7 0
1 8 3
1 7 9
5 3 2
R e v e
n u
e s
7 ,3
7 0
5 ,3
4 7
5 ,2
0 2
1 ,1
9 2
1 ,2
2 6
1 ,2
1 5
1 ,4
9 9
5 ,1
3 2
1 ,0
4 6
1 ,0
9 9
1 ,0
5 5
1 ,2
7 3
4 ,4
7 3
9 3 3
9 9 4
9 7 0
—
2 ,8
9 7
F o
o d
a n
d p
a p e
r 2
,1 7 6
1 ,3
4 6
1 ,3
1 7
3 0 9
3 2 4
3 2 4
3 7 8
1 ,3
3 5
2 5 3
2 7 1
2 4 8
2 9 8
1 ,0
7 0
2 2 2
2 3 7
2 2 8
6 8 7
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
2
,1 3 4
1 ,4
7 9
1 ,3
7 7
3 2 2
3 2 2
3 1 4
3 7 1
1 ,3
2 9
2 7 0
2 7 3
2 6 3
3 1 5
1 ,1
2 1
2 3 7
2 3 5
2 3 2
7 0 4
O c c u
p a
n c y a
n d
o th
e r
o p
e ra
ti n
g e
x p e
n s e s
1 ,8
6 8
1 ,1
8 9
1 ,2
2 1
2 7 5
2 8 1
2 8 9
3 5 0
1 ,1
9 5
2 4 2
2 4 4
2 4 4
2 9 8
1 ,0
2 8
2 1 1
2 0 8
2 1 7
6 3 6
C o
m p a
n y r
e s ta
u ra
n t e
x p
e n s e s
6 ,1
7 8
4 ,0
1 4
3 ,9
1 5
9 0 6
9 2 7
9 2 7
1 ,0
9 9
3 ,8
5 9
7 6 5
7 8 8
7 5 5
9 1 1
3 ,2
1 9
6 7 0
6 8 0
6 7 7
—
2 ,0
2 7
G e
n e
ra l a
n d a
d m
in is
tr a ti v e e
x p
e n
s e s
5 8 9
4 6 9
5 6 4
1 3 0
1 2 9
1 2 5
1 6 3
5 4 7
1 1 0
1 1 1
1 0 9
1 5 2
4 8 2
1 0 4
1 0 9
1 1 0
3 2 3
F ra
n c h is
e a
n d l ic
e n s e e
x p
e n s e s
—
3 9
3 4
1 1
9
1 3
2 1
5 4
1 2
1 7
1 6
3 4
7 9
1 4
1 8
1 4
4 6
C lo
s u
re s a
n d
i m
p a
ir m
e n
t e
x p
e n
s e
s
2 1 3
2 3
1 4
(1 )
6
4
2 1
3 0
2
1 4
4
2 6
4 6
2
6
2
1 0
O th
e r
in c o m
e
—
—
(1 0
) —
—
—
1
1
—
—
—
—
—
—
(3 )
(1 )
(4 )
6 ,9
8 0
4 ,5
4 5
4 ,5
1 7
1 ,0
4 6
1 ,0
7 1
1 ,0
6 9
1 ,3
0 5
4 ,4
9 1
8 8 9
9 3 0
8 8 4
1 ,1
2 3
3 ,8
2 6
7 9 0
8 1 0
8 0 2
—
2 ,4
0 2
O p
e ra
ti n g
p ro
fi t
$ 3 9 0
$ 8 0 2
$ 6 8 5
$ 1 4 6
$ 1 5 5
$ 1 4 6
$ 1 9 4
$ 6 4 1
$ 1 5 7
$ 1 6 9
$ 1 7 1
$ 1 5 0
$ 6 4 7
$ 1 4 3
$ 1 8 4
$ 1 6 8
$ —
$ 4 9 5
O p
e ra
ti n g
p ro
fi t g
ro w
th
—
1 5 %
(1
0 )%
(1
2 )%
(1
9 )%
(2
2 )%
(1
)%
(1 3
)%
7 %
8 %
1 8 %
(2
3 )%
1 %
(9
)%
1 0 %
-2
%
0 %
C o
m p a
n y s
a le
s
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
1 0 0 %
F o
o d
a n
d p
a p e
r 3
1 .1
2
8 .2
2
9 .2
2
9 .8
3
0 .7
3
1 .1
2
9 .6
3
0 .3
2
8 .7
2
9 .3
2
8 .3
2
8 .2
2
8 .6
2
9 .1
2
9 .2
2
8 .9
2 9
.1
P a
y ro
ll a
n d e
m p lo
y e
e b
e n e
fi ts
3
0 .5
3
0 .9
3
0 .5
3
1 .2
3
0 .4
3
0 .2
2
9 .0
3
0 .1
3
0 .7
2
9 .5
2
9 .9
2
9 .9
3
0 .0
3
1 .1
2
8 .9
2
9 .2
2 9
.7
O c c u
p a
n c y &
o th
e r
o p
e ra
ti n g
e x p e
n s e s
2 6
.7
2 4
.9
2 7
.0
2 6
.6
2 6
.5
2 7
.9
2 7
.4
2 7
.1
2 7
.4
2 6
.5
2 7
.7
2 8
.4
2 7
.5
2 7
.5
2 5
.8
2 7
.5
2 6
.9
R e
s ta
u ra
n t m
a rg
in
1 1
.7 %
1
6 .0
%
1 3
.3 %
1
2 .4
%
1 2
.4 %
1
0 .8
%
1 4
.0 %
1
2 .5
%
1 3
.2 %
1
4 .7
%
1 4
.1 %
1
3 .5
%
1 3
.9 %
1
2 .3
%
1 6
.1 %
1
4 .4
%
1 4
.3 %
C o
m p a
n y s
a le
s
$ 6
,6 9
4
$ 4
,7 7
8
$ 4
,5 1
8
$ 1
,0 3
4
$ 1
,0 5
9
$ 1
,0 4
0
$ 1
,2 7
7
$ 4
,4 1
0
$ 8 8 2
$ 9 2 3
$ 8 7 9
$ 1
,0 5
4
$ 3
,7 3
8
$ 7 6 3
$ 8 1 1
$ 7 9 1
$ 2
,3 6
5
F ra
n c h is
e e
s a le
s
6 ,8
0 8
1 1
,0 6
1
1 3
,3 0
4
3 ,0
5 2
3 ,2
2 3
3 ,3
8 4
4 ,2
8 1
1 3
,9 4
0
3 ,1
0 7
3 ,3
3 7
3 ,3
2 4
4 ,0
9 6
1 3
,8 6
4
3 ,1
9 0
3 ,4
9 1
3 ,4
4 4
1 0
,1 2
5
C o
m p a
n y s
a m
e -s
to re
s a
le s g
ro w
th
1 %
2 %
(3
)%
3 %
4 %
4 %
3 %
3 %
(2
)%
0 %
(6
)%
(8 )%
(4
)%
(2 )%
(2
)%
0 %
(1 )%
S a
m e -s
to re
s a
le s
—
—
0 %
3 %
2 %
3 %
2 %
2 %
(2
)%
(1 )%
(6
)%
(8 )%
(5
)%
(1 )%
0 %
1 %
0 %
T a
c o B
e ll
s a m
e -s
to re
s a
le s
—
—
0 %
9 %
8 %
9 %
9 %
9 %
2 %
1 %
(2
)%
(5 )%
(1
)%
(2 )%
1 %
3 %
1 %
K F
C s
a m
e -s
to re
s a
le s
—
—
0 %
0 %
(5
)%
(6 )%
(3
)%
(4 )%
(7
)%
3 %
(2
)%
(8 )%
(4
)%
(4 )%
(7
)%
(8 )%
(6 )%
P iz
z a
H u
t s a m
e -s
to re
s a
le s
—
—
0 %
0 %
5 %
5 %
(1
)%
2 %
(3
)%
(8 )%
(1
3 )%
(1
2 )%
(9
)%
5 %
8 %
8 %
7 %
T ra
d it io
n a
l g ro
s s n
e w
r e
s ta
u ra
n t
o p e n
in g s
4 4 7
3 4 9
6 4
6 8
9 4
1 3 7
3 6 3
6 6
5 3
6 1
8 6
2 6 6
5 1
4 0
4 1
1 3 2
T ra
d it io
n a
l n e t
u n
it g
ro w
th
(5 4
) (1
4 0
) (5
8 )
(5 4
) (4
0 )
(2 9
) (1
8 1
) (3
3 )
(3 3
) (3
7 )
(7 4
) (1
7 7
) (6
9 )
(1 8
) (5
6 )
(1 4
3 )
T ra
d it io
n a
l n e t
u n
it g
ro w
th %
0 %
(1
)%
0 %
0 %
0 %
0 %
(1
)%
0 %
0 %
0 %
0 %
(1
)%
0 %
0 %
0 %
(1 )%
S o
u rc
e:
C o
m p
a n
y d
o cu
m en
ts .
For the exclusive use of , 2019.
Yum! China 511-040
23
Exhibit 6a Store Openings (number of units), 2000 through 2010 (forecast)
Source: Company documents.
Note: PHDI stands for Pizza Hut Dine In. “Others” includes Pizza Hut Home Service and East Dawning.
Exhibit 6b Stores by Format, 2000 through Third Quarter, 2010
Source: Company documents.
For the exclusive use of , 2019.
511-040 Yum! China
24
Exhibit 7 KFC and Pizza Hut Locations, December 2009
HLJ 77
JL 52
JX 42
AH 51 HB 76
HN 85
HN 57
SX 45
GX
38
SX 58
SC 81
Inner Mongolia
25
NX
4
GS
20
QH
3
GZ
12YN
28
Tibet
XJ 18 LN 131
HB
102 SD 182
SH 246
BJ 229
TJ 74
FJ 94
GD 428
JS 322
ZJ 273
Store Count by Provinces
End of 2009
HN 19
Source: Company documents.
For the exclusive use of , 2019.
Yum! China 511-040
25
Exhibit 8 KFC Photos
Wuxi Beijing
Xiamen Shanghai World Expo
Source: Company material except Beijing photograph, which is courtesy of R. B. Halaby.
For the exclusive use of , 2019.
511-040 Yum! China
26
Exhibit 9 KFC Menu Items and Prices, October 2010
Item Price (yuan)
Entrees: Extra-Tasty Crispy Burger 12.5
Zinger Burger 12.5
New Orleans Roasted Burger 13.5
Cod Fish Burger 8.0
Beef Wrap 14.0
Mexican Twister 11.0
Dragon Twister 11.0
Shrimp Burger 15.0
Snacks: Original Recipe Fried Chicken (1/2 pieces) 7.5/13
Hot Wing 8.0
New Orleans Roasted Wing 9.0
Popcorn Chicken 8/11/15
Nugget 11.0
Cod Fish Finger 8.5
Side Items: Corn Salad (Standard size) 5.0
Corn Salad (Family size) 13.0
French Fries 6.5/7.5/9.0
Mashed Potato 3.5
Egg & Vegetable Soup 5.0
Corn-on-the-Cob 5.0
Dinner Roll 1.5
Cold Drinks: Pepsi Cola/7UP/Miranda 5.0/6.0/7.0
9 Lives 7.5
Nestea 6.0
Ice Cream Float—Coffee/Ice Cream Float—Irish Coffee 9.5
Lemonade 7.5
Grass Jelly Milk Tea 8.0
Soya Milk 6.0
Dole 6.5
Hot Drinks: Tea 5.0
Milo 5.0
Coffee 5.5
Hot Milk 5.0
Classic Milk Tea 7.0
Soya Milk 5.0
Citron Tea 6.0
Desserts: Egg Tart 5.0
Egg Tart (6 pieces) 25.0
Sundae (Strawberry/Chocolate) 7.0
Ice Cream Cone 3.0
Family Pack: Bucket of Chicken 64.0
Meals: New Orleans Roasted Burger Combo 24.0
Extra-Tasty Crispy Burger Combo 23.0
Zinger Burger Combo 23.0
Mexican Twister Combo 21.5
Dragon Twister Combo 21.5
Cod Fish Burger Combo 24.0
Shrimp Burger Combo 25.5
Beef Wrap Combo 24.5
New Orleans Roasted Wing Combo 28.5
Hot Wing Combo 26.5
For the exclusive use of , 2019.
Yum! China 511-040
27
Item Price (yuan)
Kids Meals (with toy): A 16.0
B 19.0
C 19.5
D 19.5
Breakfast: Bacon Egg Flaky Pastry 10.0
Smoked Chicken Flaky Pastry 10.0
Egg Burger with Cheese 6.0
Mini Burger 8.0
Cheesy Sausage Burger 9.0
Cheesy Bacon Burger 9.5
Preserved Egg & Lean Pork Congee 6.0
Chicken Congee 6.0
Beef Congee 7.0
Dough Stick 3.0
Sweet Dough Stick 3.0
Potato Stix 3.5
Breakfast Meals: Congee Combo A 8.0
Congee Combo B 8.5
Flaky Pastry Combo 13.5
Egg Burger with Cheese Combo 10.0
Cheese Sausage Burger Combo 12.5
Mini Burger Combo 11.5
Cheese Bacon Burger Combo 13.0
Source: Company information.
Exhibit 10 Comparison of Chinese and U.S. KFC Restaurant Unit, 2009
KFC China KFC U.S.
Size (sq. meters) 300–450 180–280
Avg. number of menu items 50 29
Avg. annual turnover $1.4 million $1.0 million
Avg. check size $2.50–$3.50 $5.00–$6.00
Avg. number of transactions/yr. 467,700 181,800
Operating margin (2009) 21%+ 14%
Avg. number of employees/unit 60 35
Source: Company data and casewriter estimates.
For the exclusive use of , 2019.
511-040 Yum! China
28
Exhibit 11 Pizza Hut Photos
Shanghai
Xian
For the exclusive use of , 2019.
Yum! China 511-040
29
Exhibit 11 Pizza Hut Photos (continued)
Xiamen
Pizza Hut Interior
Source: Company material.
For the exclusive use of , 2019.
511-040 Yum! China
30
Exhibit 12 Customer Survey Data (% respondents checking top 2 boxes)
2007 2008 2009 2010 Jan-Sep
Attributes KFC McD KFC McD KFC McD KFC McD
Good Taste 73%* 57% 70%* 54% 68%* 52% 67%* 52%
Menu Variety 65%* 57% 63%* 54% 64%* 52% 62%* 51%
Innovation 67%* 54% 65%* 49% 65%* 48% 62%* 45%
* Stands for Significant Difference
Three key attributes
Source: Company data.
For the exclusive use of , 2019.
Yum! China 511-040
31
Exhibit 13 Map of Logistics Centers
Yum! Logistics China — District Map
Kunming Guangzhou
Xiamen
Hangzhou
Shanghai
Nanjing
WuhanChengdu
Xian Qingdao
Beijing Shenyang
物流中心区域分布图
District Map
绿色:分仓
Green: branch
红色:主仓
Red: main
center
Chongqing
Zhengzhou
Haerbin
Urumchi
Suzhou
Source: Company documents.
For the exclusive use of , 2019.
511-040 Yum! China
32
Exhibit 14 Yum! China Development Group
Yum! China’s development group was responsible for finding new restaurant sites, negotiating leases, constructing new restaurants, and renovating existing units. Over 450 people were in the development team; senior team members all had more than 10 years experience at Yum! China.
The decision of when to move into a new city was very complex and based on factors such as GDP, population, personal income, and—most importantly—the government’s plans, which were focused on inland cities. Yum’s development team searched for hot spots for new economic development. Yum had people familiar with each geographic area, organized in a very tight system reaching from nation to region to city to street. Each store location decision had to be supported with data to show why it was a good area. “One critical principle is that we treat each restaurant as the only restaurant we have,” commented Chu. “We are not just looking for success in a market but for the success of every restaurant. All of our systems—training, supply, marketing, customer service— must be in place from the beginning to support each unit.”
Chu noted that Yum was the first choice of at least 90% of the top retail chains, such as Walmart, when they were developing new stores. Smaller cities warmly welcomed KFCs. “The opening of the first KFC signals that a city has arrived,” commented one manager. “We turn it into a big celebration.”
Yum had about 400 construction teams working simultaneously across the country on new units or to renew or remodel another 250 units per year. “There are probably 1,000 projects going on at any one time,” noted Chu. “Development is a long-term activity. We are building capability for the future. This team now has the capability to open 1,000 new restaurants a year if we need to.”
In 2010, the Yum development team was confronted with not only higher rents due to real estate having increased several times in value, but also a challenge for space from competition that included luxury brands as well as restaurants. Chu commented, “Even though we pay the same rent, we may not win the location because luxury brands are more appealing than food to the landlord or the mall.”
Source: Casewriter, based on company interviews.
For the exclusive use of , 2019.
Yum! China 511-040
33
Appendix A
The Chinese Diet
For the Chinese, dining was important not only for food, but also for social interactions. Under the planned economy from 1949 to 1978, food shortages led to a coupon-based supply for many products, including cooking oil, flour, rice, and meat. Since the reform and opening up of China’s economy in 1978, people’s income, food availability, and variety increased, and Western cuisines were introduced into China, resulting in a number of changes in the Chinese diet.
The traditional Chinese diet contained more grains than proteins and vegetables. As people’s living standards improved and food supply became abundant, the intake of animal proteins increased, while the consumption of grains and vegetables decreased. The per capita annual meat
consumption in China increased from 4 kilograms in 1949 to 54.8 kilograms in 2008.4 Sugar consumption also rose as the variety of pastries, sweet snacks, and sugar-sweetened beverages
increased. In addition, Chinese cuisine used cooking oil more heavily than Western cuisines.g
Traditionally, three generations of the Chinese family lived together, and grandparents would prepare meals for the whole family. The Chinese preferred fresh food and would purchase food items in markets every day. With the growing popularity of refrigerators and emergence of supermarkets, many people went to supermarkets on a weekly basis, though many retired people still went to neighborhood markets daily. Supermarkets offered both fresh foods and cooked or semi-cooked dishes, which helped busy couples save time because most women in China continued to work after marriage. As the living conditions improved, the younger generations started to live separately after they got married. Most of them had lunch at company canteens or restaurants, but went to their parents’ home for dinner if they lived nearby. If they lived far away, they would cook by themselves or eat out. Many Chinese went to restaurants on special occasions like birthdays and holidays or during weekends. Dining with clients or friends at restaurants was also common. Given the faster pace of living, convenience and speed became increasingly important, and more young people, either married or single, chose to eat out if they could afford it. A variety of options existed at different price levels, ranging from medium and high-end restaurants and fast-food chains to roadside food stands that were conveniently located in every neighborhood but had poor sanitation conditions.
Unlike Westerners who ate what they ordered individually, the Chinese shared dishes and preferred a variety of dishes. It was typical for a table of 10 people to order four appetizers, six to eight main courses, and two dim sums (small dumplings). For business meals, the host would generally order more than needed to show hospitality. The Chinese also liked to try new dishes, so they would go to different restaurants or expected to have a few new dishes when they went to the same restaurant again.
Each region of China had its own cuisine and dietary preferences. For example, the Sichuan and Hunan provinces were famous for their spicy dishes. People in the eastern region preferred a light taste, while those from the northern region were inclined to a heavier and saltier taste. As more people left their hometowns to study or work in other cities, they became more open to different cuisines.
Many Chinese considered Western fast food clean and delicious and liked the environment of KFC, McDonald’s, Pizza Hut, and Starbucks. Some parents would reward their children by taking
g Kitchens in Chinese apartments tended to be very small, with no stove. Most cooking was done in a wok.
For the exclusive use of , 2019.
511-040 Yum! China
34
them to KFC or McDonald’s. In metropolises like Beijing and Shanghai, one could also find restaurants serving different ethnic foods, such as French, Italian, Japanese, Korean, and Thai.
Appendix B
Competitors in China
Over the past three decades, China’s catering (food service) industry grew rapidly. Even during the financial crisis, the top 100 players in the industry achieved revenue of RMB 125 billion (about $18 billion) in 2009, an increase of 22.6% over the previous year.5 Among the top 100 players, over 90% were chain restaurants, with the top 10 players accounting for over half of the revenue. Fast-food restaurants and “hot pot” restaurants (where raw meat was cooked by diners at the table in a special pot containing boiling soup) accounted for 40.5% and 26.3% of the revenue, respectively.6 Yum! China had led the top-100 list for many years.
McDonald’s
McDonald’s entered China in 1990 with its first restaurant in Shenzhen (near Hong Kong), followed by a second outlet in Beijing in 1992. The company grew carefully, adding about 100 restaurants a year. In 2006, McDonald’s signed a 20-year agreement with the Chinese state-owned oil company, Sinopec, to open McDonald’s drive-through restaurants at any of Sinopec’s 30,000 gasoline stations in China.h In February 2008, McDonald’s introduced 24-hour-a-day delivery service in Shanghai (with no minimum order value but a delivery fee of about $1 for any amount of food, delivery to anywhere within five kilometers of a restaurant in 45 minutes or less via motorcycle or bicycle couriers). In 2009, delivery service was expanded to six cities, including Beijing, Guangzhou,
and Shenzhen.7
McDonald’s offered 24-hour operation in over 70% of its China outlets, heavily promoted through its “Moon Man” character, while virtually all of the chain’s advertising in China made some reference to 24-hour service.8 In March 2010, McDonald’s opened a “Hamburger University” (training facility) in Shanghai. The company invested $250 million in the facility, which was the seventh Hamburger University in the world. The goal was to have 5,000 graduates in five years.9 McDonald’s hoped to have 2,000 stores by 2013.
Hamburger and fries remained McDonald’s core offerings, although most of its sales were chicken-based products (55% in 2006, compared to 35% beef-based products and 10% fish). “Customers come to us because they want us to be McDonald’s, and when we try to become something we’re not, they don’t like it,” said Tim Fenton, the chain’s president for the Asia, Pacific, Middle East, and Africa (APMEA) region, in a September 7, 2010, USA Today article. McDonald’s offered breakfast, but in contrast to KFC, McDonald’s morning items were very similar to those in other markets, with Egg McMuffins, pancakes, and hash browns. In 2009, McDonald’s derived around 7% of its China sales from breakfast, compared with 30% in the U.S. and 18% to 20% in
Singapore and Malaysia.10
McDonald’s total revenues were $22.7 billion in 2009 (see Table B-1), including $3.7 billion from the APMEA region. APMEA included China, which accounted for about one-fourth of the region’s revenues.
h Yum also worked with Sinopec.
For the exclusive use of , 2019.
Yum! China 511-040
35
Table B-1 Selected McDonald’s Data (in $ millions except per data share)
2009 2008 2007 2006 2005
Total revenues $22,745 $23,522 $22,787 $20,895 $19,117
Operating income 6,841 6,443 3,879 4,433 3,554
Net income 4,551 4,313 2,395 3,544 2,602
Cash provided by operations 5,751 5,917 4,876 4,337 3,904
Capital expenditures 1,952 2,136 1,947 1,742 1,607
Net income per share-diluted 4.11 3.76 1.98 2.83 2.04
Dividends declared 2.05 1.63 1.50 1.00 0.67
Systemwide restaurants 32,478 31,967 31,377 31,046 30,766
Source: Adapted from McDonald’s, 2010 Annual Report.
Other Western Chains
Subway The first Subway restaurant in China opened in 1995. The company expanded slowly. In 2009, Subway opened 32 restaurants, bringing the total number of units to 150, and announced plans to have 500 units within five years. Subway was testing localized menu items such as a Beijing roast duck sandwich.
Dairy Queen Dairy Queen, an American fast-food and ice cream chain, opened in China in 1992 in Beijing. Over next 10 years, Dairy Queen opened about six stores a year as it tried to figure out the franchise model. By 2010, there were over 300 outlets in China. In September 2010, Dairy Queen announced plans to have more than 500 outlets by the end of 2011.11
Burger King Burger King opened its first unit in Shanghai in 2005. The firm originally announced plans to have 1,000 restaurants in China by 2015, and possibly as early as 2010.12 However, by 2010, there were fewer than 40 Burger King restaurants in China.
Papa John’s Louisville, Kentucky–based Papa John’s (2009 revenues of $1.1 billion), the third- largest pizza chain in the U.S., opened its first store in China in 2003. By 2010, it was the second- largest pizza franchiser in China with 157 restaurants (18 company-owned and 137 franchises) in 32 cities at the end of 2009. In September 2010, Papa John’s announced plans to double the number of units over the next three years.
Starbucks The Seattle, Washington–based coffee giant Starbucks opened its first shop in Beijing in 1999. In April 2010, Starbucks CEO Howard Schultz announced plans to open “thousands
of stores” in China over time.13 It opened its 400th store on mainland China in September 2010 (117 were in Shanghai) and was pushing into the interior, with new stores in Hunan and Xiamen. In November 2007, Starbucks introduced its bottled Frappuccino coffee drinks to Chinese consumers through supermarkets. The company launched nine different tea drinks in March 2010. The goal was to integrate more Chinese elements into its product lineup. Starbucks also planned to launch its “Via” instant coffee in China, although it gave no specific date.
For the exclusive use of , 2019.
511-040 Yum! China
36
Chinese Chains
The traditional Chinese cuisines relied greatly on the skills of the individual chef, making it hard to standardize the operation and scale up. However, a number of Chinese restaurants—influenced by the Western fast-food chains—adopted chain operations and looked to expand nationally.
Kungfu Established in 1994, Kungfu Catering Management Company was China’s first chain restaurant to achieve the Chinese Fast Food Standardization certificate. In 2010, Kungfu was the largest Chinese fast-food chain, with over 300 restaurants in Guangzhou, Beijing, Shanghai, Shenzhen, Hangzhou, Suzhou, and other major cities. Kungfu’s menu included dishes such as pork ribs in sauce, mushroom chicken, and mustard beef, which were served with rice and vegetables, soups and noodle dishes, desserts, and snacks such as curry fish balls. Kungfu operated three
logistics centers.14
Little Sheep China’s Little Sheep Group, a popular full-service chain offering Mongolian “hot pots” and with headquarters in Baotou, Inner Mongolia Autonomous Region, was established in 1999 and was listed on the Hong Kong Stock Exchange in 2008. The company reported revenues in 2009 of RMB 1.6 billion (about $230 million) and net profit of RMB 155 million (about $21 million). The company had a total of 161 company-owned restaurants and 293 franchise restaurants.15 In March 2009, Yum paid $63 million for a 20% stake (later increased to 27.3%) in Little Sheep Group.
Source: Compiled by casewriter from various articles and company websites.
For the exclusive use of , 2019.
Yum! China 511-040
37
Endnotes
1 “McDonald’s China Strategy,” Los Angeles Times, September 17, 2007, http://articles.latimes.com/2007/ sep/17/business/ft-mcdon17, accessed October 2010.
2 Paul French and Matthew Crabbe, Fat China: How Expanding Waistlines are Changing a Nation (New York: Anthem Press, 2010), p. 15.
3 “Fat City, Fat Kids,” Shanghai Daily, January 26, 2010, ISI Emerging Markets database, accessed October 21, 2010.
4 Jun Wang and Junwei Teng, “Per Capita Meat Consumption of the Chinese People Increased by 13 Times over 60 Years [in Chinese],” Xinhua Net, September 4, 2009, http://www.news.cn, accessed October 20, 2010.
5 Industry Development Department of China Cuisine Association, “Report on the 2009 Top 100 Players in China’s Catering Industry Released [in Chinese],” China Cuisine Association website, http://www.ccas.com.cn/ Article/HTML/12768.html, accessed October 21, 2010.
6 Industry Development Department of China Cuisine Association, “Report on the 2009 Top 100 Players in China’s Catering Industry Released [in Chinese].”
7 “McDonald China adds 24-hour delivery service to more cities,” Alibaba.com, May 19, 2009, http://news.alibaba.com/article/detail/business-in-china/100104482-1-mcdonald-china-adds-24-hour- delivery.html, accessed October 2010.
8 Michael Schaefer, “Fierce competition in China drives push for longer hours, new dayparts,” Euromonitor International, July 31, 2009, http://www.euromonitor.com/Fierce_competition_in_China_drives_push_for_ longer_hours_new_dayparts, accessed October 2010.
9 Elaine Kurtenbach, “McDonald’s opens Hamburger U. in China,” Food Inc., March 30, 2010, http://www.msnbc.com, http://www.msnbc.msn.com/id/36095820/, accessed October 2010.
10 Schaefer, “Fierce competition in China drives push for longer hours, new dayparts.”
11 “Dairy Queen to Boost China Presence,” The Herald-Sun, November 16, 2010, http://www.heraldsun. com/view/full_story/9751934/article-Dairy-Queen-to-boost-China-presence?instance=main_article, accessed November 2010.
12 “Burger King Plans 1,000 Stores in China by 2015,” Forbes, September 8, 2005, http://www.forbes.com/ feeds/afx/2005/09/08/afx2212136.html, accessed November 2010.
13 Mariko Sanchanta, “Starbucks Plans Major China Expansion,” Wall Street Journal, April 13, 2010, http://online.wsj.com/article/SB10001424052702304604204575181490891231672.html, accessed October 2010.
14 Kungfu company website, http://www.zkungfu.com/en/index.aspx, accessed November 2010.
15 “Little Sheep Group Ltd,” Bloomberg Businessweek, http://investing.businessweek.com/research/stocks/ snapshot/snapshot_article.asp?ticker=968:HK, accessed November 2010.
For the exclusive use of , 2019.