KFC looks at China as US faces recession

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Shanghai, May 5:: in China," Novak told investors in a conference call in February.

So far, investors are welcoming the China strategy. Operating profit at Yum's China division surged 30 percent to $375 million last year, accounting for over a quarter of the firm's total operating profit of $1.36 billion, which rose 8 percent.

Novak has predicted China's contribution could reach 40 percent by 2017, exceeding 30 percent for the United States at that time. Despite sliding US revenues, which dropped 7 percent last year, Yum's shares are up about 29 percent since the start of 2007, while the Dow Jones Industrial Average is flat.

The portly, white-haired figure of Colonel Sanders helped draw Chinese to KFC restaurants in the late 1980s, when China was opening up to the world and customers were eager to experience Western lifestyles for the first time.

But in the last few years, Yum has increasingly designed products and services specifically for local consumers. This strategy has had problems as well as opportunities.

"It's a lot more difficult to standardise Chinese food. It's much easier with hamburgers," said Shaun Rein, managing director of the China Market Research Group, adding that another problem was finding the right managers to run all the outlets.

This year Yum plans a nationwide launch of its breakfast services, now available at about half of KFC stores, and will test 24-hour KFC restaurants and expand home delivery services to target the huge nocturnal populations of China's crowded cities.

It will also add 85 Pizza Hut restaurants and expand the chain's home delivery service.

Yum's China manager, Su, has successfully transformed Pizza Hut, a business that was languishing in China, into an upscale restaurant chain targeting China's 250 million middle-class consumers.

"Pizza Hut is the cheapest of the cheapest restaurants in the United States, but in China, Pizza Hut is seen as a classy, up-scale place for dining," Rein said. "Yum has reinvented the Pizza Hut brand in China ... They know who's spending the money."

Risks

Nevertheless there are risks associated with Yum's rapid expansion in China such as over-exposure, analysts say.

"If there are too many KFCs in the street, people would feel sick of it. There may be a backlash; The same store sales will go down. Margins would be hit," Rein added.

Based on Yum's track record so far though, analysts believe it will be able to navigate successfully through the complicated fast food scene in China.