The Faltering and Future of Fast Food in China

fast food china yumYum! is the American fast food company responsible for the licensing of popular brands such as KFC, Pizza Hut, and Taco Bell. As of 2011, Yum! had become the largest restaurant company in China claiming forty percent of the fast-food market share and a quarter of a million employees (McDonald’s had around 16% of the market share). However, over the years Yum! has been faced with scandal after scandal due to the lack of decent supply chains in China. Sick of these constant battles with the media and tarnishing of the brand’s reputation, David Novak (previous CEO) looked to build his own distribution system in China, creating the second-largest logistics system in the country next to the Army’s. This move, which was part of a distinct China strategy, allowed Yum! to experience consistent success in the market.

However, recently Yum! has undergone some major changes, which threaten the sustainability of the brand as it stands now in China. The current CEO replaced a strong leader who broke into the largest untapped market in the world. Although Yum! Brands seem to be doing fine overall, those investing in Yum! China might want to take a closer look at where the company is headed strategically.

Losing More Than a Leader

David Novak has been with Yum! for nearly thirty years and is directly responsible for the expansion into China and the creation of an incredible logistics system. During Novak’s tenure as CEO the company’s stock rose from $8 to $76.25 and the market capital grew from $4.6 to $31billion. Many hail Novak as one of the most successful restaurant CEOs of all time and may wonder how his leaving Yum! might affect the company.

It comes to no surprise that major moves are taking place within the company after new CEO Greg Creed stepped up to play in 2015. Not only has the company experienced volatile returns in China, but Yum! has also been the center of yet another scandal involving tainted meat. Not to say that Creed is to blame in any sense, just that his tenure comes at an unfortunate time for the fast food industry in China. Despite Creed’s statements to make China his top priority and turn sales around in the 2014 Annual Report, another future is in fact in store for Yum! China…

After reflecting on the recent performance of Yum! companies in China, the inevitable supply scandals, and heightened competition, Yum! Brands Inc. has decided to split away from its Chinese counterpart by the end of 2016. This strategic move will allow Yum! China to have more control in taking care of its problems without interference from abroad. Furthermore, the main Yum! Brands Inc. will be able to bring capital back to its investors while franchising the nearly 7,000 stores owned by the company in China.

Targeted Tech

Although Yum! is splitting from its Chinese counterpart, this does not mean that the Yum! brand has been defeated in China. The CEO of the Yum! China division, Micky Pant, is being groomed by Sam Su, the executive responsible for building the KFC brand into the biggest restaurant in China. Although Su is retiring this month, the two men have worked out an intriguing strategy to capitalize on the changing consumer dynamics.

Even though many are suggesting that Yum! explore the fast casual concept (i.e. Chipotle) to reposition itself in this now highly competitive market, I believe Yum! might be better off taking a cue from the KFC model. KFC has targeted the media crazed youth and leveraged opportunities across various media platforms. KFC in China currently offers interactive experiences via WeChat and Weibo, and allows mobile payment via QR scanning; the company is also piloting electronic menus and self-ordering services. Providing consumers with more interactive and engaging experiences excites them and allows the brand to stay more relevant in the customer’s mind.

Antoinette Savoie
MBA Candidate 2016