Yum China: Strategic Expansion Plans

Yum! China

Strategic actions for expansion in 2011

Table of Contents
1.0 Problem Identification 2
2.0 SWOT Analysis 2
2.1 Strengths 2
2.2 Weaknesses 4
2.3 Opportunities 4
2.4 Threats 5
3.0 Yum! China’s Strategic Decisions 5
3.1.1 Expansion rollout plans 5
3.1.2 Expansion plans – Human Resources 6
3.2 Tackling the Perception of QSR associated Obesity 6
3.3.1 Brand Positioning – City Tiers 6
3.3.2 Brand Positioning – Target Audience 7
4.0 Recommendations 7
4.1.1 Proposed Expansion Strategy for Yum! China 7
4.1.2 Proposed Augmentation of HR Strategies (Internal Marketing) 9
4.2 Further improvements to reinforce healthy image 10
4.3.1 Brand Positioning – City Tiers 11
4.3.2.1 Brand Positioning – Target Audience (Teenagers) 12
4.3.2.2 Extending the Family and Communal Dining Concept – Bundling 12
5.0 Time Horizon of Implementation 13
6.0 Performance Indices and Success measurement of Proposed Market 14
7.0 Conclusion 16
Appendix A 16
Appendix B 16

1.0 Problem Identification
Yum! Brands (Yum!), parent company of several restaurant chains, including Kentucky Fried Chicken (KFC), Pizza Hut and Taco Bell entered China market with its first KFC outlet in 1987. Since then, Yum! under the leadership of Sam Su, has been extremely successful. Instead of being seen as a Western brand, Sam’s decision was to make the chain a “part of China”. Catering to the Chinese market, the image and offerings are localized and are extremely different from outlets overseas, winning Yum! the hearts of Chinese consumers. Yum! China’s revenues have now exceeded that of USA.
Yum! has decided on an aggressive expansion plan in China. Therefore the scope of this project will encompass the following:
Objectives • To increase market share by expanding into new geographic markets
Issues • Handling the image of QSR being associated with obesity
• High rental costs
• Labour constraints limiting expansion plans
• Changing consumption behaviours
• Positioning strategies across various city tiers
• Response to competition from international QSRs
2.0 SWOT Analysis

2.1 Strengths – The reason why Yum! China has been so successful in expanding in the Chinese market is due to its competent management team. CEO Sam Su recruited an experienced team locally based which could speak Mandarin. The strong corporate culture also managed to attract and retain highly motivated individuals which led to the continued success of the organization. Because the management team were given much control, due to PepsiCo not knowing much about the fast food business, they could make decisions quickly and independently. They were highly responsive to the changing demands of different regions and also analysed and negotiated for great real estate deals upon which to build their restaurants. Yum! China basically had a team which clearly understood the nuances of the different geographical markets, and knew intrinsically what customers wanted. They developed a flatter learning organization and developed their staff to make decisions and to speak up and share ideas with management.
Another major factor contributing to the success is their extraordinary supply chain. Yum! China is said to have a first class supply chain, only second behind the Chinese Army. The logistical operations is able to handle the complexity of over 50 items on KFC’s menus, reaching deep into inland China while constantly introducing highly customized variations (84 – 100 new products a year) to suit the local taste palates.
The company also had developed important “Guan Xi” with the locals, supporting the domestic market by buying Chinese products, working with Chinese farmers and government organizations. Because of the backwards integration and knowledge transfer, Yum! China is able to maintain exemplary health and hygiene standards which are lauded as the benchmark for all food companies in the country. Overall, Yum! China brands such as KFC and Pizza Hut enjoys strong brand equity, and according to the A.C Nielsen survey, is the global brand most recognized in China. KFC consistently outscored fierce rivals McDonalds on every attribute on taste, menu variety and innovation for 4 years running (Exhibit 12). As KFC continues to expand into the rural parts of China, people welcome the company and feel that “the city is coming to their town”.
Finally, the low cost of factor inputs has enabled Yum! China to expand exponentially. By vertically integrating local suppliers into the supply chain they are able to source for cheaper, more reliable products. They are also able to rapidly build up new outlets at US$0.6 Million within a matter of months. These factors have enabled Yum! China’s to enjoy operating margins of 21+% as compared to 14% in the USA (Exhibit 10).
2.2 Weaknesses – COO Mark Chu admitted that its expansion capabilities are bottlenecked by its employee capabilities. Despite having the capacity to expand 1,000 outlets a year, the company does not have the human resources to match the ambitions. It takes time to train capable staff that fit the corporate philosophy so that Yum!’s brands can maintain high service excellence and standardization across its outlets. Furthermore each restaurant is significantly bigger as compared to other global outlets, which means they need about 60 staff per outlet to manage the crowd, whereas USA stores only require 35 staff (Exhibit 10). This is a problem because in the service industry, employee turnover rates can be high. Additionally, many Chinese parents are unwilling to allow their “little emperors” to take up service jobs.
2.3 Opportunities – There is no denying that China is the fastest growing economy in the modern world, and industry experts predict that Yum! China’s revenues will double the USA market. Although still very much a developing country, there is a rise in affluence among the middle class, and the numbers are increasing. In addition to that, ever since the markets opened dramatically in 1992, there is an increasing appreciation for all things western. Yum! China’s core brands being positioned as “western” brands as a result benefited from the “westernphile” attitudes of many Chinese; the locals are willing to try out and experience western food and dining experience. The economic boom in in China has also led to developments in communications, technology and transportation. These advancements have opened the opportunity for Yum! China to expand its logistical operations further into rural China and engage customers via modern marketing channels.
2.4 Threats – The opening of the domestic markets has also welcomed competition from internationally renowned brands such as McDonalds, Subway and Starbucks. These companies are huge players with incredible financial resources. Yum! will now have to monitor competitive actions in order to defend its market share in China. The influx of foreign brands has also led to increases in rental and factor costs due to competition for resources and will weaken profit margins.
A key threat to the fast food industry is an increase in negative associations with western junk food contributing to China’s obesity problem. 22.8% of PRC adults were overweight while 7.1% were diagnosed as clinically obese. Worryingly, one-third of the world’s fat kids are from China. Being the strongest player in the fast food industry, Yum! will therefore have to take necessary strategic actions to address this very real social problem.
Lastly, there has been a generation shift in the key children segment. Yum!’s marketing current strategies targeted at children might no longer appeal to the new generation.
3.0 Yum! China’s Strategic Decisions
3.1.1 Expansion rollout plans
Even with the tidings of new international QSR brands opening in China, Yum! brands do not need to be overly concerned about their market share because they are the dominant player in the industry in a market place that can accommodate new entrants. Yet, this does not mean that Yum! China should rest on its laurels. Hence, the expansion strategy for Yum! would be to capture new geographic markets ahead of competitors to enjoy the first mover advantage by leveraging on its strong brand equity and superior logistics network.
Instead of following the traditional franchise model, 90% of Yum!’s stores in China are company owned. The team believes that Yum! should continue with this strategy due to its success due to their regionally localized menu and the ease of which top management can make decisions rapidly and implement changes in the menu. This gives them operational flexibility to cater to changing tastes.
3.1.2 Expansion plans – Human Resources
The rate at which Yum! China can expand their brands is directly tied to the ability to acquire sufficient manpower to man the stores. To make up the large quantities of human resources required to operate, KFC has taken to hiring college students. KFC has been successful in attracting and training new members with their training restaurant concept and in 2010 managed to attract 30,000 new staff to operate their 500+ new restaurants.
Since Yum!’s stores are labour intensive, we believe that the increasing competition for human resource from prestigious sectors hinders Yum!’s expansion plans. Yum! needs to augment their training strategies to maintain a sizable workforce and continue opening new outlets at the rate they are going now.
3.2 Tackling the Perception of QSR associated Obesity
A threat that China as a country is facing is the growing problem of obesity amongst both the adult and children. Although the current perception of fast food chains in China (KFC in particular) is not associated with the social threat of obesity, Yum! China has taken pre-emptive measures to promote healthy eating. They have introduced healthier methods of cooking, added vegetable dishes and informing their consumers that a balanced diet is crucial. They have also eliminated super-sized meals and minimized discounts on combos. They also sponsor sports events for youths and work together with the government to promote nutrition campaigns.
We believe that Yum! has done well in establishing that they are serious about supporting healthy eating in China. In order for Yum! to further expand, it is imperative that they enhance this campaign to maintain their positive image in the mind of consumers.
3.3.1 Brand Positioning – City Tiers
Being a foreign company attempting to enter the China market, it is imperative for Yum! to position itself as part of the local Chinese community and to make the brand highly relevant to consumers in different parts of China. As such, Yum! has to strategically position itself to be incorporating both the best concepts from U.S. fast-food model (operational efficiency and quality service) while also customizing their brand to suit Chinese consumers’ needs. At this point in time, the offerings and prices of each KFC outlet are largely similar across the country with variations in spice level depending on each area’s consumers’ preferences. We believe that more can be done to leverage on intra-country differences (e.g. different consumption habits of Chinese consumers in various cities) by positioning its brand accordingly for different tiers.
3.3.2 Brand Positioning – Target Audience
KFC has traditionally emphasised on a family concept thus far in China. An arising issue is that the previous generation of children exposed to these marketing programs are now teenagers. As such, we propose that KFC should tailor their strategies to both retain and better meet the needs of the new generation of children in China.
Also, we believe that the family concept can be extended to a social bonding concept that promotes group dining. Apart from the “Family Pack” consisting one bucket of chicken, Yum! mainly offers individual meal combos. Therefore, Yum! can expand on its variety of product offerings to cater to more target groups.
4.0 Recommendations
4.1.1 Proposed Expansion Strategy for Yum! China
In the short term, Yum! will focus in the lower tiered cities around the logistic nodes. This strategy would be cost efficient whilst enabling rapid expansion and capacity maximization. Once the logistics are fully utilized, the long term objective will then be to create new logistics centres further inland in order to cut down transportation lead times and hence, expand more aggressively to extend its influence (from East to West) towards inner-China. Because markets in these geographic regions are underserviced (Exhibit 7), Yum! can quickly establish a foothold ahead of competitors. Fewer competitors also mean rental expenses will be lower. Furthermore this is in line with government policies to spread development towards central and western China.
From Exhibit 6a, a simple extrapolation was done to forecast the number of stores opening. Along with current resource constraints, such as hiring capabilities, the team believes that 530 outlets should be opened in 2011. Majority of the new outlets will be KFC, because KFC is well known even in rural China. Its menu better caters to the mass market as compared to Pizza Hut which is more for the affluent market segment. The breakdown of shop outlets to be opened in 2011 is shown below in Figure 2a. Tier Population Growth per Annum 2011 est. Population (in million) 2011 Projected Number of Stores 2011 Targeted Number of People Per Store (in million) Number of New Stores to be Opened Number of Store Openings Per City
1 1.0048 52.5 709 0.074 31 7.87
2 1.0048 81.8 929 0.088 70 2.68
3 1.0048 65.6 547 0.12 111 1.85
4,5,6 1.0048 141.3 1285 0.11 226 0.40
Total
3471 438

The proposed rollout of KFC stores by city tier is shown in figure 3. The rollout plan is projected based on 2009’s data, and the detailed computation is shown in appendix A. The rationale behind the projection is that with the annual population growth of 0.48% , KFC should at least maintain and if possible, try to reduce its number of people per store by opening up more branches. We set a target number of people per store for each tier city in 2011, and compute the number of stores by using total population to divide target number of people per store. Moreover, 101 KFC stores will be opened up in tier 1 & 2 cities, and 337 in tier 3 to 6 cities. The ratio of number of stores in lower tier cities in proportion to total number of stores (53% in projected 2011) is larger compared with previous years (49% in year 2009). This is in line with our strategy to move into lower tier cities, with both an increase in absolute number and percentage of total number of stores. The remaining 92 outlets will be opened under Pizza Hut and other of Yum!’s subsidiaries.
In order to address the threats of higher rentals and being overlooked by more prestigious brands, Yum! China should enter into tying agreements with property developers such as Yanlord or Capital Malls to ensure that its brands will be guaranteed floor space in new malls. This co-branding strategy will lead to synergies for both companies because they have strong brand equity. By positioning Yum! brands as the anchor tenant, property developers would benefit through higher human traffic flow. Also, it solves Yum!’s difficulty of finding new real estate to situate its outlets and enjoying a lower rental cost. Such a win-win strategy is highly beneficial to both parties.
4.1.2 Proposed Augmentation of HR Strategies (Internal Marketing)
With our decision to move Yum! inland, we potentially face the problem of human capital migration. It is a fact that many aspire to work in Tier 1 cities, leaving lower tier cities less fertile of human capital. Therefore, Yum! should identify and nurture ‘star’ part-time college students to serve at lower tier cities. Being in a Western-style company whilst still being rooted in traditional Chinese values will appeal to many and Yum! must clearly present this image to all new hires. The opportunity to manage a restaurant if they perform well is an effective form of internal marketing and provides everyone with a very attractive job prospect.
We also propose a slight modification to the training system. As a service provider, it is crucial for Yum! to have standardized service performance standards in all of their restaurants country wide. As Yum! trains RGMs in their Tier 1 or 2 restaurants, before the official promotion to a full RGM, their last assignment would be to head their own restaurant in a new restaurant in-land. With the growing expansion trend, it is crucial that we have talented staff to head new restaurants. Incentives should be provided by Yum!, such as full costs of living subsidized and additional allowances to encourage the move to inland and lower tier cities. This serves three purposes:
1. Talented and dedicated RGMs will be able to inculcate and develop the same culture in new restaurants
2. Maintain service procedures and standards at the high level they are currently at
3. Offer an attractive job prospect to job seekers
Yum! should do the reverse as well. Offer workers who originate from lower tier cities opportunities to work in Tier 1 and 2 cities if they convert to full-time staff and perform well.
4.2 Further improvements to reinforce healthy image
Advertising Campaign - To enhance KFC’s existing efforts in dealing with obesity in China, Yum! should launch a series of marketing programs (both posters and TV advertisements) to educate the public on their healthier menu. This includes producing television advertisements that leverage on its healthy and extensive menu to promote KFC as the healthier choice. This will differentiate themselves from other fast food chains that are closely following tested-and-tried models of QSR. As health consciousness increases, KFC may become their preferred fast food chain.
Educational Kitchen Tours - To play a more active role, Yum! could initiate an “Open Kitchen Concept”, by arranging guided tours for consumers to gain insights on site facilities and food preparation procedure of KFC. Through this, a greater and better impression of KFC will be forged by engaging consumers. Consequently, this would generate positive word of mouth effect for KFC bringing healthier food choices to the Chinese.
Sponsor e-sports tournaments – In face of the rise of digital gaming, Yum! should tap on the digital savvy youths. Furthermore, these individuals may face higher risk of obesity. We propose that in addition to physical sports tournaments that Yum! is already hosting, Yum! could either sponsor or organize e-sports tournaments, where gamers meet and watch competitors play live. Yum! can educate this group of consumers on the importance of a balanced diet, increase their outreach to the youth market as well as gain exposure and prominence in this industry.
4.3.1 Brand Positioning – City Tiers
In the higher tier cities (i.e. Tier 1 and 2 cities) with more affluent consumers, KFC is patronized by people frequently to meet their daily consumption needs and such purchase only constitutes a small portion of their income. Also, there are more substitutes available. Based on these facts, it can be gleaned that the consumers in these regions tend to be more price elastic. As such, Yum! can position itself as a functional brand by competing mainly based on price factors. Yum! can entice these customers by providing them with discounts and promotions like bundle sets with smaller serving and wider range of various products. In 2008, Yum! has reorganized its logistics operations to enjoy more cost reductions. As such, Yum! can be more price-competitive by transferring its cost savings in form of lower prices charged to these consumers.
Also, Yum! has to expedite the rate of introduction of new products (e.g. through their new product development program) to reduce customer defect rate since consumers have a wider variety of products and different restaurants to choose from every meal.
For the lower tier cities (i.e. Tier 3, 4, 5 and 6 cities) where consumers are less affluent, KFC is patronized by customers occasionally on special events. Since there is a lower frequency of consumption in these cities, patrons tend to be less price elastic. In these regions, Yum! can position itself as an aspirational brand by tapping on the emotional appeal of consumers. This can be done through launching promotional packages during special occasions (e.g. Fathers’ day and Valentine’s Day [not exhaustive]). Additionally, they should seek the endorsement of aspirational characters like famous sportsmen (e.g. Yao Ming) and international artistes (e.g. Jolin Tsai) to further enhance their appeal.
4.3.2.1 Brand Positioning – Target Audience (Teenagers)
To further develop and reach out to the teenager customer segment, specific segment marketing strategies can be utilised. This can be achieved through social media platforms such as Weibo and Renren, which are actively used among teenagers in China. Sponsoring e-sports as mentioned above will enable Yum! to resonate with China’s youths.
Complimentary Wifi and power sockets can be implemented in KFC stores to attract student customers as well, who view KFC outlets as a place to study. However, this complimentary service should be time based e.g. free first 30 mins of Wifi. Subsequently, a purchase is necessary in order to continue accessing the Wifi service. This recognises the importance of maintaining high turnover of customers with the nature of the fast food concept of KFC.
Next, KFC can appeal to the new generation of children by incorporating interactive gaming computer stations on top of the traditional playground concept. This would be more appealing towards the new generation of kids who tend to be more technology savvy and less interested in costume mascots and physical toys traditionally incorporated with KFC's traditional family focus marketing programs.
4.3.2.2 Extending the Family and Communal Dining Concept – Bundling
Our group recommends the incorporation of enhanced group meal bundling options within the product offering to provide more varieties and choices for customers. This would allow Yum! to reach out to more customer segments. Furthermore, this can be achieved easily without the need to create new products and inventory. An important thing to note is that the set objectives can be achieved easily without facing issues regarding R&D costs. This is also feasible under current supply chain constraints.
This bundling strategy should be differentiated between the higher and lower Tier markets as well described above; In the higher tiers, bundles can be designed to communicate more value for money e.g. Buddy Meals (for two) as it is mainly perceived as a functional brand. In the lower tiers, bundling can be designed to be linked to specific occasions e.g. Valentine’s day bundle meals with dessert, Father's Day combos (Set meals should include a balanced meal for a family) in response to the more aspirational brand perception of KFC in these markets. Refer to Figure 4 for a sample family combo meal.
Lastly, with regards to the current focus on individual combo meals, KFC can consider adopting the KFC "Box" concept available here in the Singapore market which consists of a higher variety, usually 4 or more types of main food items in a smaller portion which may be highly appealing to Chinese consumers who prefer higher variety of food ingredients in their meal. Refer to Figure 4 for a sample Box meal.
Family Combo Meal (Serves 4-5) Zinger Box Meal
Item Individual
Cost Bundle Cost Item Cost Bundle Cost
Bucket of Chicken
Dragon Twister
Zinger Burger
Corn Salad (Family size)
2x Egg and vegetable soup
4x Pepsi Cola
Egg tarts (6 pieces) 64.0
11.0
12.5
13.0
10.0

20.0
25.0 155.5

Discounted Price
138.0 Zinger Burger
Original Fried Chicken
Corn-on-the-Cob
Lemonade 12.5
7.5
5.0
7.5 32.5

Discounted Price
28.0
Figure 4: Sample Combo Meal and Box Meal

5.0 Time Horizon of Implementation

Figure 5 shows the timeline that some of our recommendations will follow. Our health related advertisements will require time to develop. Posters require relatively less time and will coincide with the first Special Occasion Combo offering. This will reassure apprehensive consumers that the food served is healthy. Health related advertising is pulsed to prevent Yum! from appearing too preachy and maximizing impact of the advertisements at selected times. Development of bundles requires no R&D but to encourage consumption, bundles will be introduced gradually, first as Special Occasion bundles, and will eventually enter the menu as regular products.
Educational Kitchen Tours will need to be developed as well. A detailed programme and scheduling chart should be developed to ensure minimal restaurant down-time. Sign-ups for the tour will open 2 months before the first tour and can be booked up to 6 months in advance. Restaurant tours will be held monthly at each restaurant. If that is infeasible, focus should be placed on tier 1 and 2 restaurants, where consumers are much more health conscious. 6.0 Performance Indices and Success measurement of Proposed Market
KFC
• Sustain current average total turnover per KFC store ($1.4m)
• Achieve $1.4m turnover/year average for all new KFC Stores (i.e. Target monthly turnover per store of $116.7 k per month)
• Expect Growth in average turnover of current KFC store A practical figure was used to adjust for consistent performance amidst aggressive expansion. We also acknowledged that new stores may encounter low sales during initial launch, before sufficient demand is generated to achieve an optimum level of turnover. Lastly, stores are scheduled to be open throughout the year, and not all stores will have an operating period of 1 year in 2011.
Tier Revenue ($m) Incremental profit per tier

1 43.4 8.1
2 98 18.2
3 155.4 28.9
4,5,6 316.4 58.9
Total 613.2 114.1

Tier Revenue ($m) Profits ($m)

1 992.60 184.62
2 1302.00 242.17
3 765.80 142.44
4,5,6 1799.00 334.61
Total 4859.40 903.85

Figure 7 shows the total revenue and profit we hope to achieve with our rollout strategy. Using the 2011 projected number of total stores, and using the 90% company owned against a 10% franchisee ratio to determine the number of franchisee stores. Profits for franchisees were calculated using 6% of turnover, and for company stores, a 20% restaurant margin was used to come to the above predictions. See Appendix B for detailed calculations.
Success of health campaign and bundling options
After one year of health promotions, another variable will be added to the Customer Survey (Exhibit 12) regarding key attributes of KFC: healthiness of KFC food. A target of 60% will be sufficient to determine the effectiveness of the first year’s marketing efforts. We also target to maintain a 62% innovation and menu variety option in the survey.

7.0 Conclusion
The team believes that Yum! has done extraordinarily well in the complex Chinese environment. Hence, the takeaway message is “not to fix what isn’t broken”. We also believe that Yum! is strategically geared for future expansion. However, in order to do so, they need to address the issues mentioned above. The team has recommended several solutions, and once implemented, the future of Yum! looks delicious!
Appendix A
Tier Population Growth per Annum 2009 Population (M) 2009 number of stores 2009 Ratio of People to Store (M) 2010 Population (M) 2010 number of stores 2010 Ratio of People to Store (M) 2011 Population (M) 2011 number of stores 2011 Benchmark Ratio of People to Store (M) New Number of Stores to be opened Number of store openings per city
1 1.0048 52 642 0.081 52.25 678 0.077 52.50 709 0.074 31 7.87
2 1.0048 81 814 0.100 81.39 860 0.095 81.78 930 0.088 70 2.68
3 1.0048 65 413 0.157 65.31 436 0.150 65.63 547 0.12 111 1.85
4,5,6 1.0048 140 1003 0.140 140.67 1059 0.133 141.35 1285 0.11 226 0.40
Total 2872 3033 3471 438

Total Number of Stores 2011 Projected number of stores (Company) 2011 Projected number of stores (Franchisee) Target Annual Revenue per Store (Usm) Target Incremental revenue of total new stores within Tier segment Target Total Turnover of stores within Tier segment Projected Company Stores Profits (20% margins) Projected Franchisee Stores Profits ( 6% Royalty) Projected Total Stores Profits (Based from current 2010 Company owned: Franchisee Stores ratio 4.56 : 1)
709 638.10 70.90 1.4 43.4 992.6 178.668 5.956 184.624
930 837.00 93.00 1.4 98 1302.0 234.360 7.812 242.172
547 492.30 54.70 1.4 155.4 765.8 137.844 4.595 142.439
1285 1156.50 128.50 1.4 316.4 1799.0 323.820 10.794 334.614
Appendix B