With its Chinese lettering and unremarkable name, the fast-food outlet in a Shanghai shopping mall looks like many others selling local fare. East Dawning is crowded with customers on this winter evening, and they're sampling a menu that includes pork fried rice, marinated egg and plum juice. Stanley Yao, a restaurateur from Hong Kong who is opening a sushi joint nearby, dines here once a month. The food is "a little too oily," he says, but he likes the soy-milk drinks, and "the prices, of course, are very reasonable." (A meal of noodles, tea and custard dessert costs $4.) With eight storefronts around Shanghai, East Dawning could soon give China's biggest fast feeder, KFC, a run for its money. Good thing for them they're playing on the same team.
Starbucks has the gall to sling its lattes for coffee connoisseurs in Vienna, and Budweiser peddles its brew in Belgium. So why shouldn't Yum Brands--the Louisville, Ky.-based company that owns KFC, Pizza Hut, Taco Bell and more--sell dumplings in a fast-growing market where Chinese food is just called food? Heck, while they're at it, why not sell tacos in Mexico? Yum is doing both, with the test-marketing of East Dawning in Shanghai and the opening of a Taco Bell in Monterrey last fall. Yum's iconoclastic CEO, David Novak, likens it to how Ray Kroc of McDonald's brought hamburgers to America. "I asked, What's the hamburger in China?" he says. "Obviously, it's Chinese food." Except Kroc was an American selling American food to Americans. Is this brilliant, or is Novak half-Kroc-ed?
Certainly Yum knows how to cross borders. Since it was spun off from PepsiCo in 1997, the company has radically transformed its overseas business. With Americans stuffed on fast-food options and domestic sales growth a skinny 2% annually, companies like Yum must go global to give Wall Street what it craves. A decade ago, stores overseas brought in less than 20% of profits; today it's 50%. In 2006 the company earned $824 million in net income on total revenue of $9.6 billion.
The story of Yum Brands shows that in the global economy, it's not so much what you sell but how you sell it. Ten years ago, Colonel Sanders was losing the global fast-food war to the Golden Arches. PepsiCo had spread its restaurant division too thin, planting capital-consuming, company-owned-and-operated stores in 32 countries instead of franchising them as it does in the U.S. But PepsiCo did set up valuable infrastructure, including supplier relationships and local management teams. "PepsiCo laid down the tracks but hadn't yet taken advantage of the opportunity," says Novak. In swift order, the newly independent Yum (named Tricon Global Restaurants until 2002) pulled its company-run operations out of all but eight countries. Later it focused expansion on three emerging economies (China, India and Russia) and three developed ones (France, Germany and the Netherlands). Over the past seven years, it has been opening stores outside the U.S., not including China, at a pace of more than 700 annually.
KFC and Pizza Hut restaurants now number more than 12,000 in 110 countries outside China, says Graham Allan, president of Yum Restaurants International (YRI). Of those stores, 85% are owned and run by franchisees. Operating profit more than doubled, from $186 million in 1998 to $407 million in 2006. International profits drove the stock price up 82% over 10 years. Yum's largest markets overseas include Australia and the U.K. Pizza Hut ranks as the most trusted food-service brand in India, and Russia will soon greet the Colonel through a partnership with top chicken chain Rostik's.
And then there's China, where Yum is so big that it has reported earnings separately since 2005. Profits from Yum's stores in China, Thailand and Taiwan popped 37% in 2006, while all other international profits grew 11%, domestic a mere 3%. A KFC opened nearly every day in China last year, and KFCs and Pizza Huts now number more than 2,300. (McDonald's has about 1,000 restaurants, not that Yum keeps track.) Sam Su, who runs Yum in China, projects 20,000 stores someday. "We're nowhere close to saturation at all," he says. "The sky is the limit."
As millions of Chinese find their wealth swelling and their time shrinking, sit-down meals involving several generations no longer fit the needs of a hurried and harried middle class. "The lifestyle is changing," says Su. "People are getting more urbanized and busy, with less time to cook at home." KFC's grab-and-go menu items were a novel solution, while Pizza Hut launched the concept of eating out at a casual restaurant with the whole family. KFC opened its first drive-through in 2002 just as China was becoming a car-owning culture. In 2001 Pizza Hut Home Service began introducing the idea of hot meals delivered to the door (which might seem ironic to Americans, for whom Chinese is the ultimate delivery meal).
Pizza and fried chicken are tasty treats, but they're not staples in China like, say, noodles and dumplings--and that's where Yum thinks it can really score. And if a Yank selling egg rolls to the Chinese seems a bit quixotic, then Novak, 55, is the right man for the job. The CEO of Yum since 2000, he's a plain-talking, cheerleading executive who boasts of never having attended business school. He's given to goofy team-building tactics like passing out rubber chickens (and $100) to KFC managers whose stores are performing well. A former $7,200-a-year advertising copywriter, Novak took his marketing chops to PepsiCo in 1987. Though he suffered his biggest failure there--Crystal Pepsi, which he still contends was the right idea at the wrong time--he was handed the reins to the KFC and Pizza Hut units in 1996. He chronicled a childhood spent in 32 trailer parks and an otherwise unconventional path to the corner office in a 2007 book titled The Education of an Accidental CEO.
This time, Novak's idea might be the right one at the right time. The menus at East Dawning restaurants don't offer overtly American fare but still attract Chinese consumers because of the quality and service associated with an American brand. The formula developed by Yum's other banners overseas--cheap food delivered in cheerful surroundings--has provided a welcome mat for the company. Diner Frank Li, a project engineer on a trip from Suzhou, says the restaurant's link to KFC and Pizza Hut is a draw, not a drawback. "Those places are good quality," he says. "You know what you're going to get. They are a very professional company that must know what it's doing, and I think the quality here shows that."