After spinoff, Yum China
faces uncertain path to revive growth
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[November 03, 2016]
By Adam Jourdan
(Reuters) - Yum China Holdings Inc <YUMC.N>, newly hived off from its
U.S. fast food giant parent, faces a tricky battle to revive sales
growth in the country, Chief Executive Micky Pant told Reuters, given
the strength of its local rivals and a volatile market.
The firm, which debuted on the New York stock exchange on Tuesday, has
seen China revenues at its KFC, Pizza Hut and other outlets flatline
since 2012 even as it has opened over 1,500 new stores. It is aiming for
stronger growth in 2017, though Pant said China was hard to read.
"We've guided to high single-digit revenue growth as our business model,
but we can't really predict year-on-year, that's the whole point in
China. You'll go up, but the path is not always straight," Pant said at
the firm's Shanghai offices.
Pant added that long-term opportunities in China "far outweighed" the
risks of doing business in the market. China's overall fast food sector
is set to grow to 1.15 trillion yuan ($170 billion) in 2020 from 902
billion yuan this year, Euromonitor data show, though growth in the
sector is slowing.
As part of Yum Brands Inc <YUM.N>, the China unit saw stellar sales
growth of over 20 percent each year until 2012. Since then, it has
struggled with food safety scares, slower economic growth, changing
consumer tastes and stronger rivals.
Yum Brands has also pointed towards food delivery apps luring diners
with cut-price deals and recent U.S.-China tensions over the South China
Sea triggering boycotts of its stores.
Pant said that the spin-off of the China unit would not, however, mark a
shift away from Yum's American roots any further than it has done
already - its brands offer Durian pizzas and popular Asian breakfast
"Being an American brand has upside and it has some risks... People in
general love America, but they might have differences with American
foreign policy," said Pant.
A recent investment, though, by Primavera Capital and Alibaba Group
Holding Ltd <BABA.N> affiliate Ant Financial Services Group would bring
extra local nous with foreign exchange, local taxes and understanding
the real estate market, he added.
SLOW AND STEADY
Pant said Yum China will focus on building its own stores rather than
via franchise partners in order to maximize returns and keep a strong
grip on food safety. In the United States the vast majority of Yum
stores are franchised.
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Labourers clean the external wall of a KFC restaurant in Huaibei,
Anhui province June 13, 2013. REUTERS/Stringer
"I think the franchise system in China is very nascent, it's very new.
In the U.S. you can go to people with franchise experience of 25
years... They know the whole deal," said Pant, adding that letting go of
control could be a "huge risk".
"In the vast, vast majority (of cases), for the next several years, we
will be building our own stores."
Yum China aims to build 600 new stores each year with long-term
potential for 20,000 outlets in the market. However, Pant said the focus
for now would be squeezing more out of its existing 7,300 stores - even
if this meant slower expansion.
"We took about $150 million of capital this year and transferred it,
instead of building new units, to refurbishing our existing stores," he
said. This has included installing cashless payment systems, efficient
LED lighting and digital menus.
Pant added Yum China was likely to attract more investors from Asia,
while the traditional U.S. investor base for Yum Brands might be more
cautious about the higher risks. One positive, though, was China's
stable political environment compared with other parts of the world.
"Look at the United States. They've got an election coming up in a week
and no-one knows what going to happen - that's the biggest risk of all.
At least we have stability here," he said.
($1 = 6.7622 Chinese yuan renminbi)
(Reporting by Adam Jourdan; Editing by Christopher Cushing)
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