By Laurie Burkitt in Beijing and Ilan Brat in Chicago
Yum Brands Inc., which gets around half its revenue from China,
is facing a new reality: Chinese consumers who once found its KFC
and Pizza Hut chains fresh and different now see them as
neither.
On Tuesday, Yum posted profit and revenue declines in the fiscal
first quarter of 2015 as it struggles to overcome setbacks in
China. Yum's China sales in the quarter were down 9% from a year
earlier, to $1.26 billion, following declines in the third and
fourth quarters of last fiscal year. Overall net income slid 9% to
$362 million in the quarter from a year earlier on sales of $2.62
billion.
Novelty was a big draw for Chinese customers when Pizza Hut and
KFC--along with other American brands such as McDonald's Corp. and
Wal-Mart Stores Inc.--swept into China in the late 1980s and '90s.
Decades down the line, these brands face customer defections to
newer rivals.
Liu Yue, a 30-year-old finance worker who began eating at Pizza
Hut several years ago, this weekend tried out a newly opened Pizza
Express in one of Beijing's hottest shopping centers instead of
going to the nearby Pizza Hut.
"I wanted a nice restaurant, not fast food," he said, describing
Pizza Hut's offerings as "unsophisticated."
Pizza Express, originally a U.K. chain that Chinese
private-equity firm Hony Capital acquired last year, sells pizzas
for 80 yuan to 135 yuan, or from $13 to as much as $22, including
one with spicy Italian sausage and marscapone and fennel seeds,
with chefs tossing the dough in view of customers.
Yum Brands promoted Pizza Hut in China by offering food far
beyond pizza, such as fried Chinese rice dishes and French steak.
That approach led to some baffling menu items, such as a pizza sold
two years ago that had 24 Milanese sausages baked into the crust,
circling a pie topped with squid, crab, fried shrimp and a
mayonnaise drizzle.
It is a recipe for success that may have run its course with
some consumers.
"Pizza Hut sells food they think Chinese will like, not
authentic food," said a 27-year-old government employee who gave
only her surname, Liu.
Sales at Chinese Pizza Hut stores open more than a year declined
6% in the first quarter.
Pizza Hut's travails are emblematic of the brands that arrived
early in China but are losing cachet.
In 2012, 39% of consumers in China surveyed by market-research
firm Millward Brown called McDonald's a desirable brand, while a
third said the same of Pizza Hut. In a survey last year, that had
dropped to less than a quarter for both brands.
Some domestic dining chains have also eaten into the U.S.
brands' turf. China's Xiabuxiabu Catering Management Holdings Co.
serves hot pot--a broth in which customers cook their own meat and
vegetables--at a price that competes with Pizza Hut's 88 yuan
black-pepper-beef-fajita dish. Xiabuxiabu, which listed its shares
in Hong Kong last year, aims to double the number of its stores to
1,000 in the next four years, rivaling Pizza Hut's count.
Yum declined to comment on defections to competitors.
Yum Brands, based in Louisville, Ky., has seen the writing on
the wall for a while. "It's true, we're not [new] anymore," said
Yum's China chief, Sam Su, in an interview in 2013.
To win consumers looking for a more upscale experience, Yum
Brands is opening a high-end Italian eatery in Shanghai, Atto
Primo, by the end of April, said a China-based spokeswoman for Yum.
In the Bund area along Shanghai's Huangpu River, Yum will sell
pasta dishes in the $25 range as well as Wagyu steak for 298 yuan,
roughly $50, well above the 35 yuan spaghetti it sells at its Pizza
Huts in China.
For now, Atto Primo appears little more than an experiment. Yum
has "no future plans other than to see how this performs with
consumers," the spokeswoman said, adding that Atto Primo "may serve
as an innovation lab for Pizza Hut."
Meanwhile, KFC, the first Yum Brand chain to enter China, in
1987, is facing an even worse loss of appeal. Only 19% of
respondents called it a desirable brand, down from 42% in 2012,
according to the Millward Brown survey, while a quarter view it as
"different," compared with 42% in 2012.
KFC has faced other setbacks in the market. Chinese media
reports last summer connected KFC with a restaurant supplier that
allegedly sold expired meat. Yum responded quickly by pulling the
supplier, but last October said that companywide sales in China for
the fiscal third quarter fell 14% at restaurants open at least a
year. Before that, the company, which runs more than 6,000
restaurants in China, was dealing with public backlash that began
in November 2012 over reported use of growth hormones and
antibiotics by two KFC chicken suppliers. The company subsequently
reduced its number of suppliers and apologized for "communication
missteps," but said its products were safe.
Attempting a comeback, Yum's Mr. Su overhauled the KFC menu last
year, adding more rice dishes, and has been remodeling restaurants.
Most recently, KFC launched coffee drinks to compete with
McDonald's McCafé stores. But Mr. Su has said he isn't trying to
match the aspirational image that Chinese consumers once had of
KFC.
McDonald's, which opened in China in 1990, is also trying
tactics for renewal there, such as restaurants with Barbie and Hot
Wheels themes. McDonald's Corp. declined to comment.
Loss of luster isn't confined to the fast-food chains. Wal-Mart
Stores Inc. in recent years is treading water in China while
domestic megamarket retailer China Resources Enterprise Ltd, which
gears itself to a growing Chinese middle class, has moved
ahead.
Wal-Mart's market share has stayed constant at 11.2%, while
China Resources has overtaken it, going from a 9.8% share in 2009
to 13.9% in 2014, according to market-research firm Euromonitor
International.
A spokesman for Wal-Mart said the comparison between the stores
was unrealistic. "It is like comparing Whole Foods in the U.S. to
Wal-Mart," he said.
He said the company continues to gain in all areas, including
market share, but declined to give details.
Consultants say that refreshing stale brands will be
challenging, but that some brands, such as Starbucks Corp. are
investing frequently in remodeling their stores to stay fresh. A
Starbucks spokesman declined to disclose its investment in
remodeling but said that the company has overhauled stores since
entering China in 1999.
"Nobody can rest on past success anymore, and companies have to
keep reinventing themselves to remain relevant," said Matthew
Crabbe, an Asia-Pacific research director for consultancy Mintel
Group Ltd.
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