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The Biggest Problems for Yum! China (KFC, Pizza Hut) Going Forward

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Yum! China has now been spun off. And being a separate company should naturally fix many of its problems. But going forward, there are three things that still really concern me.

#1 – There is no free lunch in the China restaurant business.

How well you did in the past just doesn’t count for that much in China restaurants.

  • Consumers change their preferences all the time. You continually need new menu items. And even then, successful brands and franchises in China simply fall out of favor sometimes.
  • The competition is ruthless and there is little protection from it. Even Yum’s +7,500 outlets are just a tiny fraction of the millions of Chinese restaurants competing on a daily basis. As I tell my students, you don’t go to Kenya to compete in long-distance running and you don’t go to China to compete in restaurants. Both the Kenyans and Chinese restaurateurs will run you into the ground.
  • There are also numerous external forces that can knock you down at any time – such as media attacks, changing government rules and food safety issues.If you are a market leader in Chinese restaurants, you will have a food scandal at some point.

Basically, Chinese restaurants are developing economy hyper-competition that never ends. It’s ruthless and you have to re-fight and re-win every single year.

#2 – Within this fight, management speed and ability are what matter the most.

KFC and Pizza Hut both are good franchises. That’s a big strength in China. It also helps that Chinese consumers just really like chicken (they don’t like hamburgers nearly as much).

Add to this that Yum China also has some economies of scale, mostly in marketing and in their operating systems. That gives them some protection from smaller rivals.

But, despite these strengths, their market share is always going to be vulnerable. Their revenue can rise and fall (as we have seen). Whether their past successes continue will overwhelmingly depend on changing consumer preferences and local management ability.

And when you look at KFC’s China past success relative to other franchises, you can see it had a lot to do with now retired China Head Sam Su. His team simply outran and outperformed everyone else on the field. Note three things about Sam.

  • He was local and understood the market. He was from Taiwan and had worked at P&G in Asia prior to joining KFC. And being Chinese / Taiwanese is an advantage. If you think it isn’t, you don’t understand China.
  • He was able to act and react quickly. He radically changed the local KFC menu and was able to act relatively independently of HQ. He was also very well financed.
  • He was committed long-term. He moved to KFC early in his career and spent +20 years on the ground in the PRC – building from 4 to +6,000 restaurants. This was not a corporate rotation for a few years. He was committed to China long-term.

So who is Yum’s proven China expert who will commit to the Mainland and fight for KFC there for the next 10 years?

Or more simply: Who is the new Sam Su?

#3 – Consumer preferences change pretty fast in China

This is sort of the big existential threat. What if younger Chinese consumers just don’t like pizza or fried chicken as much as their parents? You can add and change ancillary menu items like salads and deserts but if your customers fall out of love with your core menu, there isn’t really much you can do. I wrote an article about how this seems to be the problem with Mexican food and Taco Bell.

Fortunately, Chinese consumers really seem to love KFC’s fried chicken in particular. It’s crazy popular. But changing consumer preferences is always a risk in restaurants.

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Those are my big three concerns for Yum! China. There is currently a lot of discussion about the move into third tier cities and expanding delivery service. I really don’t worry about those things as they are just another management challenge. And Yum China has been quite good at such challenges.

Thanks for reading. – Jeff

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I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.

Photo by Matt Doughty, Creative Commons license link here.

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