May 6, 2008

 

KFC turns its attention to highly profitable Chinese market
 

 

Kentucky Fried Chicken (KFC) has turned to the Chinese market in view of falling domestic sales and a possible US recession.
 

Yum! Brands Inc., owner of KFC, has decided to expand in China which could be its biggest pot of gold within a decade.

 

In an effort to succeed in this venture, KFC is adapting to local tastes and lifestyles, offering a menu that includes fried dough and preserved egg porridge alongside with its trademark fried chicken. The formula appears to be working well, as sales in China grew 12 percent in the first quarter compared with the combined 8 percent in the US and internationally. KFC is also set to expand on its breakfast, evening and home delivery services.

 

Yum plans to add 425 restaurants in China this year compared to McDonald's aim of 125 stores.

 

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

 

David Novak, chief executive of Yum, forecast that China's contribution could reach 40 percent by 2017, exceeding 30 percent for the US at that time.

 

Although Yum has been designing products and services specifically for the Chinese in the past few years, the strategy has met with problems alongside with opportunities.

 

It is a lot more difficult to standardise Chinese food compared to hamburgers and finding the right managers to run all the outlets is no easy task either, according to Shaun Rein, managing director of the China Market Research Group.

 

Analysts said that Yum's rapid expansion in China could suffer from a backlash of over-exposure, which would impact margins. However, they also believe that Yum would be able to succeed in China.

 

The China model is working so well that Novak is now copying it to the US by introducing healthier products, increasing emphasis on breakfast and evening sales and broader menus that include more desserts and beverages, Rein said.

 

Yum's KFC was the first foreign fast-food company to venture into China, opening its first outlet in 1987. It has since opened over 1,800 outlets in China with about US$2 billion of annual sales.