The One Question That Matters For Yum (KFC, Pizza Hut) In China by Jeffrey Towson, LinkedIn
Yum! Brands (KFC, Pizza Hut, Taco Bell?has been getting a lot of criticism about China this week.
- They missed their 3Q2015 earnings estimates. Multiple analysts dropped their price targets and their market cap sunk $7B.
- This lower-than-expected performance exacerbated lingering frustration with their 2014 food scandal (and subsequent sales slump).
- There is criticism of Pizza Hut China in particular – such as the new steak menu and a decrease in corporate events.
- Activists are arguing for a spin-off the China operations. Or perhaps some other strategic move like divesting Taco Bell or Little Sheep or franchising more China outlets (most are owned).
I think most of these criticisms are exaggerated or off-target. The China restaurant business is changing fast and is still largely unpredictable.
But I think there is one huge problem for Yum China. And it is the problem that has not yet been mentioned. My question for Yum is this:
Dov Gertzulin's DG Capital is having a strong year. According to a copy of the hedge fund's letter to investors of its DG Value Partners Class C strategy, the fund is up 36.4% of the year to the end of June, after a performance of 12.8% in the second quarter. The Class C strategy is Read More
Why, for the first time in +15 years, is Yum senior management (including the China Head) 100% non-Chinese?
I’m not saying they have few senior leaders from China. I’m saying they now have none. I no longer see a single Chinese person among the senior officers – including the Head of China. And this is a company with 6,900 outlets and +50% of sales in China.
But let me rephrase this as a challenge – and in a less racial / ethnic way.
I challenge you to read the bios of Yum’s senior management (located here) and point to the person who is their China expert.
- Their new CEO Greg Creed has spent the last 8 years at Taco Bell. Is there even a single Taco Bell left in China?
- Their new China Head Micky Pant is from the India operations.
- Their previous China Head and Vice Chairman (and all around China restaurant god) Sam Su has now retired.
Let’s lower the bar a bit. Forget being from China or a China expert. How about just someone with deep experience in East Asia? Try to point to that person on their senior management page.
Let’s lower the bar even further. Is there even a single senior officer at Yum who speaks Mandarin?
This is a bit of a rant. In fact, most multinationals rotate people across geographies. What concerns me here is really two things.
#1 – There is no free lunch in the China restaurant business.
How well you did in the past doesn’t count for that much in China restaurants.
- Consumers change their preferences all the time. You continually need new menu items (I am writing this in a Beijing Pizza Hut and count 23 new 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 6,900 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 China, 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).
Yum China also has some economies of scale, mostly in marketing and in their operating platform. That, plus some degree of brand power, is another strength and it gives them some protection from smaller rivals.
But, despite this, their market share is still vulnerable. Their revenue can rise and fall (as we have seen). Whether their past successes continue will overwhelmingly depend on their 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 local manager 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. Or an expat doing a victory lap at the end of his/her career. He was committed to China long-term.
I don’t see anyone like that in Yum’s senior management today. And no, good sub-heads in China don’t count when you’re talking about +50% of revenue.
So let me rephrase my question a last time:
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?
Thanks for reading. I regularly write about Chinese consumers and competitive dynamics. If you would like to read my regular posts, please click ‘Follow‘ or send a connection request.
Previous posts include:
- Stop Calling Me an Introvert. I Prefer “Power Thinker”
- The One Number That Matters for Uber China
- How I Went From NYC to Working for Prince Alwaleed
- Get Ready for the Uber – DidKuaidi Price War
- How to Save Uber in China (part 1)
About: I am a Professor of Investment at Peking University Guanghua School of Management. I am also an investor and former executive / slave to Prince Alwaleed. My newest books are “The 1 Hour China Book” and “The 1 Hour China Consumer Book“. Read a sample chapter here.