4/24/12
Yum! China
Case analysis
Samantha Melanson
Samantha Melanson
Yum! China
Case analysis
1. What were the special challenges in business environment that Yum!
had to overcome in the 1990’s to develop its business in China?
Challenges:
 The government was one of the biggest challenges that Yum! China had to
deal with. This is because they were more interested in companies that could
bring technology to the country, they didn’t allow foreign companies to
operate without a local partner and without a local partner it was hard for
Yum to obtain the required permissions from the government and gain access
to preferred locations at the best prices.
 Miscommunication with slogans: since it was the customer’s first experience
with western food the early days were not without missteps. KFCs first
advertisement slogan was “finger lickin’ good”. In the U.S. customers know
that means the food is good but in China customers saw that as unsanitary
and they did not appreciate the slogan.
 Competition with McDonald’s is very strong. McDonalds entered China the
same year the first Pizza Hut was opened in Beijing. They located themselves
in the bigger cities where it was easier to expand. They were growing just as
fast as Yum! was and they were offering many more services like 24-hour
operation and delivery services.
 Developing 16 “beachheads: The day Chinese leader Deng Xiaoping decided
that it was time to “open up the rest of the country” every city and providence
was looking for a foreign investment. When that happened Yum was faced
with making a very important decision on the spot, whether to concentrate on
the four big (like McDonalds) or to build a national business. They decided to
go with build in a national business so they had to rush to set up 16
beachheads to from and develop a countrywide supply chain to support them.
 Building a team was a challenge because Su wanted the best of the best,
people with previous restaurant experience, people had to uphold certain
criteria and he had to sell the people he offered the jobs to on an opportunity
instead of compensation. Su looked for people with experience and the first
place he looked was McDonalds. The chief marketing officer for Yum! China
and the president and chief operating office of Yum! China where both
recruited from McDonalds. He needed for his entire team to live in China so it
took some convincing on his part to make some people move. Su wanted
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people who could write and speak Chinese and understand the Chinese
culture so that they could better understand the Chinese consumer.
Ownership was a challenge because in the beginning no foreign company was
allowed to operate without it’s a local partner. So they had to make
partnerships and franchises. However in shortly after they opened a few
stores the government began allowing wholly owned foreign enterprises so it
was another challenge to switch from a partnership/ franchising strategy to a
strategy of company-owned units. This strategy would allow for system-wide
quality standards, centralized purchasing, and a greater focus on brand
building.
Investing in a supply chain. Since Yum was growing at such a fast rate they
were having trouble meeting the capacity needed to supply these restaurants.
Also Yum was committed to sourcing in Chine whenever possible so they
restricted themselves to where the got their materials from. So they needed to
create capacity in China through local raw material suppliers not only working
with them to increase their capacity but to also improving their quality and
ensuring food safety. All of which is necessary for further expansion and in
developing the companies own supply chain.
The accelerated growth was a challenge because it was like China started
booming over night and because they needed to keep up with their biggest
competitor, McDonalds. Yum had set goals that they needed to reach every
month in growth, it started off at 100 new stores a month then it was
increased to 400. They needed to create enough supply capacity to get each
business’ needs fully covered. And KFC, Pizza Hut and the other brands in
Yum! were now expanding independently form PepsiCo at fast rate.
2. Summarize the key elements of Yum! China strategies, policies, practice
and management approaches. Identify Yum! China competitive
advantages; are they sustainable?
Strategies:
1. Build a nationwide restaurant chain that would be “rooted in China, be a
part of China.”
a. “To become the bet restaurant company not only I china but the
world”- Division’s first mission statement
b. Not seen as a foreign presence
i. Make it a part of their culture- heart of their society
ii. Make it a place to come with your family; sit down and do
homework
c. Make it wanted in town/neighborhoods
d. Develop a countrywide supply chain
2. Take a “future-back” approach
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3.
4.
5.
6.
a. Look ahead to where we want to be in 10 to 15 years
b. Build system to facilitate growth-making sure to take necessary
steps
c. Making the best informed decisions and execute with conviction
d. Long-term future
Develop and expand brand around consumer wants and needs
a. Localized items- wraps, local sauces, and local favorites
b. Specific to each region- Changed recipes to suit particular tastes in
a given region
c. Added more variety to menus- Ex. Extensive 30 page Pizza Hut
menu
d. Added lower-priced snacks and discount cards targeted at college
students to open up demographic
e. Expanded menu to include essential cultural aspects adhering to
different hours of the day in Chinese culture
i. Afternoon tea is very popular in Chinese culture- occupancy
rate after additions in the afternoons increased from 20
percent to 80 percent
ii. In 2002 opened for breakfast- allowed for distribution of
costs
Evolve the brand through product localization and differentiated
marketing
a. Embody Chinese characteristics
b. Primary focus on families- evolve with families
Ensure superior and consistent service through company-owned units
a. Allowed for the adoption of systemwide:
i. Quality standards
ii. Centralized purchasing
iii. Greater focus on brand building
iv. Consistency throughout Yum! China locations
b. Make every restaurant a training restaurant
Create a learning organization in order to promote growth
a. Had to be able to produce managers and business leaders as well as
products
i. Develop talent at the same time as building brand
Policies:
1. Food safety- work back through the system to ensure that their products
are safe, actively promoted food safety and the adoption of best practices
2. Source locally- sourced from 500-600 suppliers, committed purchase as
much as possible in China
a. Improve quality
b. Ensure food safety
c. Increase capacity
3. Understand Chinese consumer
a. Write and read Chinese
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b. Previous restaurant experience
4. Strict store development policy
a. 450 person team- maintained large restaurant portfolio
b. Reviewed two times a year
c. Negotiated lease and began construction
d. Each location had to be supported with data to prove why it was a
good location
e. All systems (training, supply, marketing, and customer service)
must be in place from the beginning to support each unit
5. Extensive training and dress code
a. Western service standards
b. Customer service training
c. Standardized operations and hygiene practices
Practices:
1. Developed a mascot- “chicky”
2. Offered children’s play area
3. Hostesses organized activities- teaching English songs and rhymes and
western dance
4. Encouraged suppliers to integrate backwards
5. Encouraged competition
6. Logistic centers
a. Contingency plans- Ex. Renting temporary warehouses for during
winter
7. actively promoted food safety and the adoption of best practices
8. “New Fast Food” concept
Management Approach:
1. Asking consumers what they’d like to see appear in their restaurants so
they could better serve the customer’s needs
2. Integrate college-aged students into the fabric of the company to ensure
longevity
3. Developing full-service logistics centers
a. Inventory management
b. Customer service
c. Transport
d. Warehouse management
4. Satellite centers- support remote areas
a. Warehouse management and transportation only
3. Identify the major similarities and differences between the strategies
implemented by Yum! China and Yum! in the US. What are the risks and
benefits in allowing such differences among subsidiaries of the same
company?
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Yum! China
Both
Yum! U.S.
•More then 90% were
company owned
•KFC outlets were 300 to
450 square meters
•KFC's menu had
approximately 50 items
•KFCs had around 60
employees
•KFC is viewed as a
restaurant: a family
friendly place to sit down
and enjoy a meal
•Introduced between 85
and 100 new products in a
year
•KFC menu is localized in
each region
•Pizza Hut menu is 30
pages long
•Developed a mascot
named Chicky to appeal to
children
•Restraunts served as a
gathering place for
families
•In China change is rapid
and that calls for
innovation, flexibility, and
fast decision making
•Restaurants offered
breakfast
•Took four to six months to
develop a new restaurant
from site identifacation to
opening
•Turnoverper unit was $1.4
million for KFC
•Training for managers
took 2 to 4 years due to
the number of products
•Decorated in KFC's
traditional red-and-white
color scheme
•Colonel Sanders' image is
featured in indoor and
outdoor signage and
advertising
•Food was cooked to order
rather than to meet
individual orders
•Positioned as a Western
Brand
•15% were company owned
•KFC outlets were 180 to
280 square meters
•KFC's menu had
approximately 29 items
•KFCs had around 35
employees
•a place to grab a quick bit
to eat for a low price
•Introduced one or two
products a year
•Menu the same in every
location
•Pizza Hut menu not as
extensive as Chinas
•Took 8 months to a year
to develop a new
restaurant from site
identifacation to opening
•Turnover per unit was
$1.0 million for KFC
•A lot of talk about
innovation but not lot of
action
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There can be both risks and benefits when there are differentiated strategies
among subsidiaries. One risk is that by having more different strategies than similar
ones the subsidiaries make it difficult for the organization as a whole to set company
wide goals. Along with goals set by the company having such differentiated goals
makes it difficult for the subsidiaries to follow the companies mission statement in
the ways top management wants it to be upheld. On the other hand having
differentiated strategies could work as a benefit towards the success of the
subsidiaries. Each subsidiary has strategies that are specific to the geographical area
they are located. For instance Yum! China has menus that are localized to each
region. By doing that they created a much wider range of customers because your
average Chinese consumer loves variety. Without the variety in the menus then these
chains would not have been as successful.
4. Analyze the company’s annual financial statements presented in Exhibits
2, 3, 5a, 5c. Compare the China and US financial situations for the year
2007 – 2009 in term of revenue growth, cost structure, etc. How
successful is Yum! China? Justify your response.
Yum! Brands Inc.
Yum! Brands revenue growth was increasing from 2005 through 2007.
However, from 2008 to 2009 Yum! Brands growth decreased dramatically from
8.53% to -4.14%. A factor that more than likely contributed to this decrease was the
economic recession that started in 2008 with the effects of it hitting consumers hard
in 2009. Even though the growth rate was declining the company was still managing
to open more stores and remain profitable. In 2006, 2007, 2008, and 2009 they
opened 318, 750, 947, and 788 new stores respectively. Along with the continual
store openings the profitability of the company kept increasing due to the companies
ability to cut costs. From 2007 to 2009 the company experienced a decrease in total
cost and expenses, it dropped form 87.15% to 85.33%. If the company can manage to
keep their costs low they will be able to sustain high profitability. Over the past 5
years Yum has experienced a steady increase in their profitability. From 2005 to
2006 it increased from 8.15% to 8.62% form 2006 to 2007 it increased from 8.62%
to 8.73% from 2007 to 2008 it decreased slightly from 8.73% to 8.53% but it rose
again in 2009 from 8.53% to 9.88%. Another thing that was continually increasing
was the company’s market price per share, except in 2008 when it fell $8.26. It was
at it’s highest in 2007 at $38.54 but after it feel in 2008 due to the recession it
started to increase again.
Yum! China vs. Yum! U.S.
Even though Yum! U.S. revenues are higher than Yum! China from 2007 to 2009
it is clear by looking at the growth rate that Yum! China is growing faster. Yum! U.S.
revenues are decreasing over this three-year period while Yum! Chinas are
increasing substantially. From 2007 to 2008 Yum! Chinas growth rate was 50.50%
compared to Yum! U.S. which was -1.35%. The next year, 2008 to 2009, wasn’t any
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better Yum! Chinas growth rate, even though it decreased, was 19.96% compared to
Yum! U.S., also experiencing decease, was -12.84%. Since the rate at which Yum!
China grew in 2008 was so drastic their profitability decreased from 2007 to 2008,
19.66% to 16.58%. However you can see that they are getting back on track with
profitability in 2009 because it increased from 16.58% to 17.49%. Even though the
dramatic increase of their company came at a huge cost they were still able to remain
profitable. Just like profitability, total costs percent of revenue increased in 2008
due to the dramatic increase in growth rate and then decreased the follow year. In
2007, 2008 and 2009 the total cost percent of revenue was 80.34%, 83.42%, and
82.51% respectively. On the other hand Yum! U.S. profitability was increasing but
this was due to the dramatic decrease in growth rate. And even though it was
increasing it was still at a lower percent then the profitability of Yum! China. You can
also see this through the number of stores being opened. In China, 471, 504, and 509
stores were opened in 2007, 2007 and 2009 respectively. In the U.S. 349, 363, and
266 stores were opening in 2007, 2008 and 2009 respectively. It is believed that
within five years it is possible that Yum’s China business can be twice as large as its
U.S. business. This data proves just how successful Yum! China is and if the
company can keep up with increasing growth rate, increasing profitability and
decreasing cost, which it already does, then it will continue to grow and be a very
successful company.
5. Evaluate the “New Fast Food” proposal: Discuss the pros and cons, risks
and potential benefits of such a new approach.
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Pros:
- Expanded already extensive menus
even more
- Added veggie dishes that are
attactive to Chinese consumers
- Promoted physical actuvity. Held
basketball competitions for boys and
sponsored gynastics dance programs
for girls
- Gave grants to reserach projects
studying health issues related to
restaurant foods and urban living
Cons:
- Eliminated "super-size" (limited
size option for consumers)
- Taking focus off of corporate
strategy (expansion) and focusing on
this new position (being healthy)
- Increased costs (healthier food is
more expenseive)
Benfits:
- Educate people about healthy
eatting
- Nutrition information was printed
on every package
- More reputable to consumer
because their efforts show they care
- Brings Chinese consumer back to
tradtion of eating a large variety of
ingredients
- Gain edge over competitors (being
the healthy choice)
Risks:
- Potentially eliminate target
popultion who perferred large size
options
- Could slow does expansion
- Allowing competitors to gain edge
over them (market share)
- Possible decrease in profitability
Samantha Melanson
6. Is it the responsibility of Yum! China to undertake single-handed such a
significant shift in nutritional content and to further depart from the
overall corporate strategy, or should it be left to the Chinese government
to educate its citizens and influence their diet? Why?
No it is not single-handily the responsibility of Yum! China to undertake this shift
in nutritional content. It is the responsibility of the government and all the other
restaurants in the industry to work together in making this change. Even though
Yum! China was the company to initiate this shift and to bring it to the governments
attention; it was done with the consumer’s best interest in mind. While doing
research in the obesity rates in China Sam Su found out that 70 to 90 million people
in China were obsess, that’s one third of the total number of obsess people
worldwide. He also found that under the one-child policy many Chinese children
were being encouraged to eat more than necessary. In 2009 the rate of obese
children in China reached 12 million. He knew that something had to be done to
change these statistics.
After going to the government and the restaurant industry association about his
concerns and presenting his New Fast Foods proposal they should have taken it into
their own hands to develop and implement new regulations regarding healthier
eating. However it would be hard for the government and the association to do it
alone they would need a company to work side by side with to be the example all the
other companies would follow. Since Sam Su is so passionate about his new idea his
company would be a perfect candidate. Yum! China would be the perfect trendsetter
not only because the CEO is so passionate about the idea but also because his
company is so focused on what is best for the consumer. By showing other
companies in the industry that you need to focus on the consumer rather than how
fast your company is growing is the first major step all the companies need to take.
After that putting the regulations into effect will be easy because all companies will
be thinking with the consumers best interest in mind.
In the end the best alternative for implementing this shift would be for the
government to develop, implement, and promote the new regulations and for Yum!
China to be their example in how they want them to be incorporated with the
companies strategies in making the restaurant industry healthier.
7. If it was decided to expand further the implementation of the “New Fast
Food” strategy, what steps would you recommend to build internal and
external support and insure its successful implementation while
satisfying the expected growth of Yum?
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Internal Steps
• Incorporate the New Fast Food proposal in the companies mission
• This will make it become part of the companies culture and it will then be
adopted by the employess and it will become embedded in the fabric of
the company
• Develop a seperate team to handle the New Fast Food strategy
• By hiring an additional team it wont take the focus off of expansion
• The new team can work with the government and report back to upper
level management
• Require additional training to learn about promoting new strategy to
consumers
• Employess and upper level managers will have a combination of
technology, videos, online trainging, and simulation
• Incorporate employees opinions in the implementation strategy
• Provid a uniform effort
• Get feedback: Is it working?
• Empower employees and make them feel imcorporated
• Emphasis the imporatnce of constint improvments
• Essential in keeping up with the continuing innovation of the industry
External Steps
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• Launch the strategy by having a promotion to gain consumer awareness
• Offer free samples of healthier food
• Offer educational seminars to educate consumers about health benefits
• Have educational activities for children
• Form a partnership with local schools and organizations
• Start healthy eatting at young age
• Increase consumer awareness and support
• Increase distribution channels
• Sponsor organizations community events by catering
• Maintain their mission, values, and culture
• Stay consistent in the way they have been operating in the past
• If they change too much about the way they operate then consumers may
not like it
• Bring in an outside consultant to review the new strategy and
implementation process
• Allow for an outside perspective
• See what is practical and impractical
• Give an opportunity for the company to make changes berfore
implementation
• Help prevent downfalls not seen by top management
• Help strenghten impact and effectiveness of strategy
Samantha Melanson
8. What changes, opportunities and threats do you foresee for the next few
years that you must take into consideration before making your final
recommendation?
Opportunities
Threats
• Rapidly growing
middle class
increases potential
market
• China is still a
developing countrylots of room to grow
and expand
• Potential
partnerships local
schools and
organizations
increase brand
awareness (new
distribution
channels)
• Expansion within
the industry by
taping into new
target markerts
• Frequent
introduction of new
products
• Shift in buyer needs
and tastes away
from industry
product - need for
higher volume of
healthy options
• Accelerated growth companies unable to
keep up with
necessary capacity
• Chinese parents do
not want their child
to work part time with no college
students to work for
them they would
have no general
managers
• Natural disaster could prevent
materials/ supplies
from getting
distributed to
remote locations
• Availability of
substitutes
Changes
• Consumer Tastes
• Shifts in the
economy
• Potentials chnages
in government
regulations
• Advacning
technology
• Shifts in consumer
trends
• Increasing fixed
costs
• Changes in top
management
9. Looking at the future, what recommendations would you make to
Chairman Sam Su to insure the long-term success of Yum! and meet his
objective to have 15,000 stores in China? Be comprehensive and justify
your recommendations.
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Sam Su and top management for Yum! China should pay particular attention to
the rapidly growing middle class. By capitalizing on this market they have the
chance to become twice as large as the U.S. business. This will open them up to a
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new market and give them a greater market share. This is a great opportunity for
expansion. It will also help to promote their brand identity and spread brand
loyalty.
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Yum! China should continue with their New Fast Food Strategy. This will keep
them differentiated from their competition and give them a competitive edge.
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Yum! China should create an annually held seminar that educates people on
health and fitness. This will be open to all employees and consumers that are
interested. It will discuss new health trends and things to do to stay active. It is
also a good way to advertise their commitment to a healthy lifestyle.
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They should develop an aggressive CSR campaign that goes along with their New
Food Strategy. This would also help them to launch other strategies that are
aligned with their overall mission.
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Yum! China should stick with their constant need for innovation and product
development. By doing this they will be keeping up with new upcoming trends
and they will be keeping their consumers satisfied with coming up with new
products.
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They should develop strategic partnership with local schools and health
organizations. This goes along with introducing healthier options to menus. This
would help to spread brand awareness. Also, it will open the company up to a
new market segment – catering
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Continue to keep the consumer’s wants and needs in mind. By keeping the
consumers wants and needs in mind you are making your company more
appealing to the consumer because they know you care about their opinions and
what they want out of their experience with your company.
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As the company expands they should watch their operating costs. With expansion
comes more expenses and if they can manage to keep their costs and expenses
low they will be able to be more profitable and therefore be able to expand even
more.
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Further their efforts in food safety. Since the beginning they have prided
themselves on making sure they get the best and safest food that is available to
them. They should also try to integrate the safety measures that they take into
their advertising so Chinese consumers can feel good about the food they are
consuming.
Samantha Melanson
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Aim to be sourcing 100% of products locally by the time they reach 15,000 stores.
By sourcing locally from China they are getting food the consumers trust and
giving back to their economy. Also if they were to ever stop sourcing locally they
would lose credibility in the eyes of the Chinese consumer.
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