Time, innovation key to KFC rebound in China

by Eric Schroeder
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The company is working to regain consumer trust in China after two supplier scandals.

NEW YORK — For Yum! Brands, Inc. there is no greater opportunity to create shareholder value than to recover lost sales in KFC China following two highly publicized supplier incidents in China in recent years, said Pat Grismer, chief financial officer of the Louisville-based company.

In a presentation at the Bank of America Merrill Lynch Consumer and Retail Conference in New York on March 3, Mr. Grismer said there is $2 billon of system sales upside within KFC and Pizza Hut, which translates into $600 million of operating profit, or about $1 of earnings per share.

“We know our brands are resilient,” he said. “We continue to have the leading brands in China. We have great capability on the ground, and we’re confident we’ll get the sales back. It’s just a question over what period of time.”

Because there is no greater opportunity to create shareholder value than to recover lost sales in China, Yum! has made getting the business back its No. 1 priority, Mr. Grismer said. To do so, though, will take time and innovation.

“We know from our past experience that it just takes consumers time to become comfortable once again once there’s been a shock to the system,” he explained. “We are seeing that recovery unfold, but we’re supplementing it with even more innovation.”

Mr. Grismer said Yum! has two menu revamps planned for 2015, up from one last year.  The first revamp will take place in the first half of the year and will focus on the lunch and dinner day parts, while the second revamp will occur in the second half and focus on breakfast and beverages.

“Through these two menu revamps, we will have touched the entire menu,” he said.

Additionally, Yum! is rolling out premium coffee at its KFC China outlets. The initiative began earlier this year in the first-tier cities and has performed well, prompting the company to continue with the roll-out, Mr. Grismer said.

“We expect to have 2,500 KFCs in China offering this premium bean to cup coffee by the end of this year,” he said. “As a point of reference, Starbucks at the end of 2015 had 1,500 stores in China. We’ll have 2,500 points of distribution by the end of this year and for a comparable cup of coffee, our price is half the cost of Starbucks. So it’s a wonderful quality offering, and it’s an extraordinary value, and consumers are responding very positively to it.”

Same-store sales growth may be the No. 1 priority for Yum! in China, but Mr. Grismer said the bigger lever for the company long term will be new unit development. He said the company’s belief in the potential of China “has not diminished at all,” and Yum! continues to “invest aggressively behind new unit development for KFC, for Pizza Hut casual dining and Pizza Hut home service.”
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