Replies to post #3269 on The Rising Influence of Rising Affluence

[DewDiligence]

YUM’s Operation in China Isn’t All Gravy

http://online.wsj.com/article/SB10001424052970203388804576612963541585884.html

›OCTOBER 6, 2011
By ANNIE GASPARRO

China's economic growth and upwardly mobile population of 1.3 billion have been irresistible lures for Western companies. But for one significant player, that growth is creating its own threat.

Yum Brands Inc. said it expects food inflation in the midteens and labor inflation of 20% in China for the current quarter. The result is that Yum, whose KFC and Pizza Hut casual-dining chains are booming in the country, must struggle to balance low-price appeal with the need to offset the chain's higher costs.

Yum said Wednesday that it didn't anticipate the inflation, when the company began promoting its low prices to boost traffic in China, which was responsible for more than 60% of Yum's operating profit for its fiscal third quarter. The company has about 3,800 restaurants in mainland China.

China's economic stimulus in recent years has sparked especially sharp inflation for food. Although the government has slowed economic growth to stem inflation, August food prices rose 13.4% from a year earlier. Prices for pork, China's favorite meat, jumped a record 52.3%.

China, which has been known for its cheap cost of doing business, is losing that edge, which hurts companies that are concentrated there, said Edward Jones analyst Jack Russo. "Unfortunately, that's the cost of doing business in emerging markets."

Yum's closest competitor in China is McDonald's Corp. But China contributed only about 3% to the hamburger chain's global operating income in the second quarter. And McDonald's has seen commodity inflation in China in just the low single digits, according to Morgan Stanley analyst John Glass.

Yum recently raised menu prices 2% in China, something the company over the summer had hoped to avoid. Yum said Wednesday it will continue raising prices gradually until costs catch up with inflation—or inflation slows.

"Our hope is that the inflation, especially commodity inflation, will abate by midyear next year. Labor inflation, we think will remain high, but not as high as it was in the back part of this year," Chief Financial Officer Rick Carucci said on a conference call.

"We are still new at the value initiatives' in China, we are on version 1.0,” he said. "The only thing that makes the adjustment tricky is in the fourth quarter, the inflation is a little bit higher than what we were anticipating."

High inflation, a source of social unrest in China, could work in Yum's favor to some extent as low-price menus at KFC and Pizza Hut boost sales.

Yum's same-store sales in China rose 19% from a year earlier in the fiscal third quarter, which ended Sept. 3. But rising costs caused Yum's restaurant margin to fall 3.9 percentage points to 21.3%. The company, which is based in Louisville, Ky., projected the figure would drop to 20% for the year—still not a bad performance for a restaurant operator.

"Going forward, we see no reason why we cannot continue to deliver at least 20% margins in China," Mr. Carucci said. "We have all of the necessary leverage."‹

[DewDiligence]

Asia Delivers (Literally) for MCD, YUM

http://online.wsj.com/article/SB10001424052970204397704577074982151549316.html

›DECEMBER 13, 2011
By JULIE JARGON

When Americans are too busy or lazy to cook, they often place an order with their favorite Chinese restaurant. So who do people in China call when they want food delivered? Increasingly, McDonald's and KFC.

Delivery is becoming an important part of the growth strategy at McDonald's Corp. and Yum Brands Inc.'s KFC chain in parts of the world where cities are too crowded and real estate costs too high to justify building drive-throughs.

In cities like Beijing, Seoul and Cairo, armies of motorbike delivery drivers outfitted in colorful uniforms and bearing food in specially designed boxes strapped to their backs make their way through bustling traffic to deliver Big Macs and buckets of chicken wings.

McDonald's Asia/Pacific, Middle East and Africa division, which accounts for more than a fifth of the company's revenue and showed same-store sales growth of 8.1% in November, is planning to add delivery service to many of the new restaurants it builds.

Already, 1,500 restaurants out of the division's 8,800 in 15 countries offer delivery, and it plans to build more than 650 new restaurants next year, with up to 250 of those in China alone.

Yum Brands, which says its Pizza Hut unit was the first Western chain to offer delivery in China, decided in 2008 to test whether chicken would prove as popular a delivery item. Now, KFC offers delivery in more than half its 3,500 restaurants in China, and Yum Chief Financial Officer Rick Carucci estimates delivery will be available in more than 2,000 new KFC restaurants in China over the next decade. The chicken chain also offers delivery in other Asian countries, the Middle East, Central America and Mexico.

As the largest fast-food chain in China, KFC is relying on delivery to help broaden the reach of its brand even more. KFC is opening about 450 new restaurants in China per year, half of which Mr. Carucci says will offer delivery.

At McDonald's, "we've used the slogan, 'If you can't come to us, we'll come to you,'" says Tim Fenton, president for the chain's Asia/Pacific, Middle East and Africa division.

Sun Yu, who works for a media company in Beijing, says he orders from McDonald's or KFC two or three times per month because it's "more convenient than going to the restaurant, especially in bad weather."

"We usually can get the food within 15 minutes after I order, much more quickly than a lot of Chinese food restaurants."

Mr. Fenton says delivery sales have been posting double-digit growth every year in every country where it's offered. In Egypt, where McDonald's first started offering delivery in 1994, more than 30% of total sales come from delivery. And delivery accounts for nearly 12% of McDonald's sales in Singapore. For KFC, delivery accounts for a third of sales in Egypt and nearly half in Kuwait.

Food delivery is commonplace in many Asian and Middle Eastern cities, from independent restaurants and local chains to hotels.

"In Egypt, you could call the Marriott hotel and have a steak delivered to you," Mr. Fenton says.

Still, it's not a model either company plans to export to Western markets. McDonald's derives about two-thirds of its sales in the U.S. from drive-through customers. Only in rare cases does McDonald's deliver food in the U.S., such as with 10 restaurants in Manhattan.

For McDonald's, equipping its restaurants in Asia and the Middle East to handle delivery involves having an area to assemble orders, which are then placed in battery-powered induction heating boxes with vents to keep humidity out so that French fries remain hot without getting soggy.

Cold items are placed in insulated containers with ice packs and both fit onto the back of yellow and red McDonald's branded motorbikes or electric scooters. Drivers wear yellow and red McDonald's uniforms and aim to deliver the food within 30 minutes.

In some countries, such as China, customers pay a flat fee of seven yuan, or just over $1, for delivery. In others, people pay a fee equal to 15% to 20% of their order price. KFC, whose drivers ride red motorbikes equipped with similar heated boxes, charges a flat fee for delivery.

Ivy Hu, who works at an advertising agency in Beijing and recently ordered several McFlurry desserts to share with colleagues, doesn't mind paying the delivery fee because it saves her from having to wait in line at the restaurant.

"You know, I can't be bothered to walk even five minutes away, to the KFC near our office, and McDonald's is a little farther," says Ms. Hu, 40.

The majority of McDonald's delivery orders are still phoned in, but the company has started offering Web-based ordering in Singapore and Turkey.

"We'd love to evolve to more Web ordering because it spares the cost of the call center. That's really the big future for us," Mr. Fenton says.

Online orders now account for about 40% of the delivery orders for both Pizza Hut and KFC in China.

"We'll probably stop building call centers as more people buy online," Yum's Mr. Carucci says, adding that people tend to order more food online because they don't feel as rushed as they do when they order by phone.‹

[DewDiligence]

McDonald’s Modernization Plan Pays Off

[See #msg-69926716 and #msg-69926521 for related stories.]

http://www.ft.com/intl/cms/s/0/43b7ede4-4690-11e1-85e2-00144feabdc0.html

›January 24, 2012 1:48 pm
By Alan Rappeport in New York

McDonald’s ended 2011 on a strong note as consumers turned to the world’s largest restaurant chain by revenues for affordable meals amid the economic uncertainty.

The company said on Tuesday that last year it recorded its strongest comparable store sales in the US since 2006, luring consumers with breakfast offerings, coffee and extended hours.

McDonald’s has recently been investing heavily in new restaurants and revamps, while its competitors have retrenched. The company’s stock price is up more than 30 per cent in the past year and has been hovering around $100 a share.

“We talk about multiple ordering points, scheduling, planning and positioning, blocking and tackling in the restaurant, with an attitude of serving more customers during those peak hours – [that] is probably the most important thing,” said Jim Skinner, McDonald’s chief executive. “It’s not rocket science.”

In the US, 40 per cent of McDonald’s restaurants are open 24-hours, and nearly 90 per cent are open at 5am. The company’s competitors, such as Yum Brands and Burger King have struggled to convince customers that they offer viable breakfast options.

Donald Thompson, chief operating officer, said the company will be rolling out breakfast across most markets to replicate the success that it has had in the US, while bringing more of its premium sandwich and hamburger offerings to its domestic market.

Mr Thompson said that McDonald’s had noticed signs of momentum among US consumers, noting increased restaurant traffic during the breakfast and dinner hours, but that the economy remained too volatile to determine if this was a sustainable trend.

However, the company’s strategy of catering to higher-end consumers with premium offerings and cash-strapped customers with its value meal has helped shield McDonald’s from the mixed economic backdrop.

Demand for McDonald’s fare was strong globally, with fourth-quarter comparable sales up 7.5 per cent year-on-year in the US, 7.3 per cent in Europe and 6.9 per cent in the rest of the world.

The company said on Tuesday that its fourth-quarter net income rose 11 per cent from a year ago to $1.376bn, or $1.33 a share, while revenues rose 10 per cent year-on-year to $6.82bn.

For the year, McDonald’s net income was up 11 per cent to $5.5bn, or $5.27 a share, on $27bn in revenues.

“Key contributors to sales were both core and new product offerings, restaurant re-imagings, and an emphasis on value and convenience,” said Sara Senatore, restaurant analyst at Bernstein Research.

Mr Skinner said McDonald’s would invest $2.9bn this year to open another 1,300 restaurants and renovate more than 2,400 existing outlets. The company will open nearly 175 in the US, 250 across Europe and 250 in China.‹

[DewDiligence]

How Do You Say Yum in Chinese?

[See #msg-67865645 and #msg-69926521 for related stories.]

http://online.barrons.com/article/SB50001424052748704768704577180993028461790.html

›JANUARY 28, 2012
By LAWRENCE C. STRAUSS

When the boss starts tossing rubber chickens at you, is it time to start worrying? Not if the boss happens to be David Novak. Chicken-throwing helped Novak turn Yum! Brands into a true, globe-girdling giant of the restaurant industry.

Think about it: If a guy builds three world-class brands—KFC, Pizza Hut and Taco Bell—and then amasses more fast-food outlets than anyone else on earth—about 36,000—wouldn't you want a personally autographed rubber chicken from him? [Actually, no, LOL.] That's just one of the ways Novak has rewarded his best troops during a remarkable 12-year reign.

It is with real chickens, of course, that he has made his true mark—and, increasingly, with chicken dinner for China. Operating from Louisville, Ky., headquarters that resemble a rambling, southern colonial-style mansion, Novak has managed to turn millions upon millions of Chinese into ardent, practically ferocious fans of Kentucky-style finger-lickin' good chicken.

In fact, KFC is now by far the largest fast-food chain in China—a ringing testament to the power of aspirational marketing.

"Not everybody in China can come to the United States; it's a very expensive thing to do," Novak says. "But you can experience what is a part of the U.S. The power of the brand is immense."

Pizza Hut has also been a big hit in the Middle Kingdom. The chain, which serves not just pizza but also appetizers, wings and pasta, is China's No. 1 casual-dining operation. In all, Yum! (ticker: YUM) garnered an estimated 45% of its $12.5 billion in revenue from China last year and 42% of its operating profit.

Novak was early to China, then pushed hard. The company is now the largest U.S. retail developer in that country, with more than 3,500 KFC stores, including 600 added last year, and another 560 Pizza Huts. It's essentially one big bet on demographics—and as Novak sees it, the odds are only getting better.

"When I first went to China in 1997, you would see the parents in line, and they would buy food for their kids. But they couldn't afford to necessarily buy anything for themselves," he recalls. That's no longer the case: "The consuming class is growing so rapidly. People say it's about 300 million people now, and in eight years, it will be 600 million."

Novak, 59 years old, is more than a strategist. He's also, as you may have guessed, a rather good humorist. Once the chicken gag wore thin, as it inevitably would, he switched to chattering teeth on legs; the idea was to recognize promising managers who walked the talk of leadership.

Behind the laughter are some very serious principles. "People leave when they don't feel appreciated," Novak says. "That's why we've made recognition a really high value. Our business is people-capability first; then you satisfy customers; then you make money."

As a result of that view, the walls and ceiling of his office are festooned with hundreds of photographs of Novak with cooks, restaurant managers and other employees around the world who have done meritorious work. Anyone applying for a management job at Yum! would do well to study those walls.

"If you can't go and put your arm around a cook and make that person feel good, don't come to work here," Novak will say.

Novak is a thoroughly self-taught practitioner of the managerial arts. "As silly as it may seem, for years when conversation turned to the subject of where people had earned their MBAs, I'd excuse myself and go to the bathroom so I wouldn't have to answer the questions," he writes in an instructive and engaging new book, Taking People With You, published earlier this month by Portfolio/Penguin.

Novak does appear to have learned a thing or two. In fact, based on one of the endorsements on the book's cover, he could be the dean of the business schools at Harvard, Wharton and Stanford combined. "David Novak," blurbs Warren Buffett, "is the best at leadership, whether teaching it in this book or practicing it."

In other words, Novak is a thoroughly worthy successor to "Colonel" Harland Sanders, known to most folks simply as Colonel Sanders, the southern gentleman who founded the company in 1952 and whose likeness still appears on KFC signs everywhere.

The original colonel—who won his title not from battle, but from the state of Kentucky as a business honor—ran the company as Kentucky Fried Chicken. Eventually, in 1964, he sold it to a group headed by future Kentucky governor John Y. Brown. After changing hands twice more, KFC, which then had 4,720 stores in the U.S. and another 1,855 in dozens of countries overseas, was acquired by PepsiCo (PEP) in 1986.

Perhaps the most remarkable part of all is how David Novak got his foot in the door and over time rose to the top, becoming chief executive of the resulting Yum! Brands and eventually carrying the mantle of the U.S. to China.

The son of a surveyor for the U.S. Coast and Geodetic Survey, he lived in 23 states before he finished seventh grade, moving from one trailer park to the next every three to four months. "We always looked at it like an adventure," he says, his southern accent tinged with inflections from Texas and the northern plains. "On every move, we tried to get up and get going early so we could always get the best possible spot in the next trailer park," he says.

The traveler eventually packed himself off to the University of Missouri. He collected a degree in journalism, went to work in advertising and eventually jumped to one of his clients, PepsiCo—or more precisely, PepsiCo's Pizza Hut chain.

As he left advertising behind, he breathed a great sigh of relief. To be beholden to clients wasn't his slice of pie. "I wanted to be accountable," he says. "I wanted to make the decisions."

He began to do just that, duking it out with such rivals as Godfather's Pizza, then run by erstwhile presidential candidate Herman Cain, Little Caesars and even McDonald's (MCD), which made a foray into pizza in 1989. Novak, ever the jester, snapped back at McDonald's with ads warning customers they'd be making a "McStake" if they ate "McFrozen" pizzas.

In his four years at Pizza Hut, Novak helped double sales and profits, earning a nice promotion for himself: He took over sales and marketing of Pepsi's flagship brand, Pepsi-Cola.

Worried about being pigeonholed a marketing guy, Novak paid a visit to PepsicCo's then-CEO, Wayne Calloway, and asked for an operations job. "I said, 'If I don't do a good job, you can fire me, put me back in marketing, do whatever you want to do, but give me a shot at this.' " In 1992, he was named chief operating officer of Pepsi-Cola North America. "PepsiCo was a company that had a reputation for taking risks on people and putting people in big jobs early in their career," he says.

The next stop: the presidency of KFC, and he took to it like a hungry man to a bucket of chicken. In fact, he says, he liked it so much that he said "no" when PepsiCo offered to put him charge of the Frito-Lay snack unit, which was then twice as large as KFC.

"I said no because I love the restaurant business," he explains. Fortuitously, he adds, his decision to stick with KFC left him in a great spot for Pepsi's 1997 spinoff of KFC, Pizza Hut and Taco Bell into a separate company called Tricon Global Restaurants [which was renamed Yum]. "I didn't know at the time that they were thinking about the spinoff," he says.

Nice break—for both Novak and investors. He took over as CEO of the new company in 2000 and the stock took off. Since the spinoff, Yum! shares have delivered a total return of more than 800%. The stock of his former parent, PepsiCo, is up 122% by comparison, and the Standard & Poor's 500 index is up 75%.

Novak, it must be said, still has a long way to go to catch up with one particular rival. Although he tops McDonald's in number of outlets, the guys with the Golden Arches do twice as much dollar volume. But if Novak has anything to do with it, that gap could start narrowing. He continues to search the world for growth opportunities, and he has plenty in his sights.

It starts with China, which is growing at a nearly 30% annual clip. Novak also is looking for serious sales in India—$1 billion in 2015, up from an estimated $230 million last year. He is also ramping up in Africa, Russia and Thailand. In all, Yum! has nearly 19,000 restaurants outside the U.S., including more than 10,000 in emerging markets.

The only real problem is at home, in the brutally competitive U.S. markets for fast food and casual dining. There are scads of rivals, and the punk economy of the past few years hasn't helped one bit. Taco Bell, which accounts for some 70% of operating profits here, clocked a 2% drop in same-store sales for the third quarter. KFC and Pizza Hut were each down 3%.

Novak and his team are making some smart moves in response. Yum! is selling more and more of its U.S. stores to franchisees, earning a lump sum up front and then steady royalties.

For instance, the portion of franchised KFC stores in the U.S. is climbing to 95% from 87%. Though stable, this kind of business isn't as profitable as running your own store in a high-return market, but Novak is simultaneously raising the portion of overseas outlets that the company owns rather than franchises. The upshot: Some 70% of all Yum!'s company-owned stores are likely to be in emerging markets by 2014, up from 53% now. [By way of comparison, 81% of MCD’s worldwide restaurants are franchised.]

In addition to the ravages of the market, Taco Bell took a public-relations hit from a 2011 lawsuit by a California resident claiming its beef didn't meet industry standards because of too many additives, but the suit was eventually withdrawn. Novak seems confident 2012 will be a recovery year for Taco Bell, thanks in part to new offerings like tacos with nacho-cheese shells.

Pizza Hut, for its part, is facing stiff competition from delivery-only operators like Papa John's and Domino's, but Novak sees room to expand in smaller towns across the country.

KFC is redoubling efforts to ensure that customers get the quality and service they expect. And Novak is unloading Yum's Long John Silver's fish chain and A&W All-American Restaurants to plow more money into emerging markets.

Investors needn't fret that Novak will be gallivanting around China while the U.S. drifts. On his visits to China he stays just long enough to say the only three things he can say in Chinese: Hello. Thank you. Build more [LOL].‹

[DewDiligence]

Cramer interviews YUM CEO, David Novak:

http://www.cnbc.com/id/46416285

Not a bad interview vis-à-vis TGDT, but I could do without the cynic-bashing and the promotion of Novak’s book.