Yum pledges 2014 recovery for KFC in China

Calling 2013 “very humbling” with net profits falling 32 percent, Yum Brands Inc. officials pledged Tuesday that 2014 will be a “bounce-back” year with the focus on a restaging of the KFC brand in China.

In a call with analysts following the release of disappointing fourth-quarter and full-year results on Wednesday, David Novak, Yum’s chief executive, reiterated the company’s goal of 20-percent earnings-per-share growth in 2014. He also promised a “show-me-don’t-tell-me” year of results that will trade on momentum for Taco Bell in the U.S. and the casual-dining Pizza Hut brand in China, both of which will benefit from the expanded rollout of breakfast.

China, where the Louisville, Ky.-based company operates or franchises 4,563 KFC units, suffered in 2013 after reports indicated its suppliers were giving chickens unapproved levels of antibiotics. More recently, reports of an outbreak of avian flu in the country threaten to do more damage.

Novak, however, said KFC’s brand reliability ratings have been steadily improving and consumer trust in the brand has reached 2012 levels. So far, the more recent avian flu reports do not appear to be impacting sales. However, he said, “It’s early days and we don’t know what we don’t know.”

Yum China's chairman and CEO Sam Su was ranked the No. 10 most powerful person in the restaurant industry on The Power List, presented by NRN. View Su’s Power List profile >>

Same-store sales for KFC in China slipped 4 percent for the quarter and 15 percent for the full year, but Novak said the company is preparing to bounce back strong in 2014. In the second quarter, Yum is planning to begin a dramatic restaging of the KFC brand there, with a menu overhaul, new products and marketing, new “consumer touchpoints,” and other initiatives throughout the year.

“The goal is to bring new energy and dramatic news for the KFC brand,” said Novak. “We’re excited to be able to take the offense and start bringing forward lots of fun promotions and news we’ve been well known for in the past, and we think consumers will respond.”

Meanwhile, the Pizza Hut brand saw same-store sales grow by 5 percent in China during the fourth quarter despite a softening of sales in December that the company called “just a blip on the radar.” Pizza Hut same-store sales for the year rose 4 percent, and Novak said the chain is the No. 1 Western brand in China, with more than 1,000 locations in 300 cities and another 200 planned for 2014.

At Pizza Hut restaurants in China, two-thirds of sales come from non-pizza items, and Novak said the chain is expanding into the breakfast daypart, now available in about 120 units and expected to be in 300 units by year’s end. The company is also testing a late-night daypart, with liquor sales.

“This is a huge opportunity, and we hope to create and own the midscale breakfast segment in China,” he said, noting that guests can get two eggs, toast and coffee with refills for the same price as a cup of coffee at Starbucks in China.

Yum added 740 restaurants in China in 2013 and expects to open another 700 there this year.

Going forward, Novak said the company is reorganizing its businesses into three divisions under KFC, Pizza Hut and Taco Bell, combining the Yum Restaurants International division, which includes operations outside of China and India, with the U.S. The fourth-quarter report is the last to include separate results for the three core brands domestically.

In the U.S., Taco Bell recorded its eighth consecutive quarter of same-store sales growth with an increase of 1 percent. The result lapped a 5-percent increase a year ago, offsetting disappointing results for both KFC and Pizza Hut, which fell 5 percent and 4 percent, respectively.

Taco Bell’s big news this year will be the completed rollout of breakfast during the first half of 2014. Taco Bell’s “First Meal” debuted in 2012 and has been growing across the country as the brand tweaks the menu.

Officials have said breakfast will play a key role in the chain’s goal of doubling sales from $7 billion last year to $14 billion over the next decade.

With 5,800 units currently, Taco Bell is on a growth path to reach at least 8,000 units, Novak said. The franchisee pipeline is picking up with 86 net new units added in 2013.

On the 4-percent same-store sales decline at Pizza Hut in the U.S., Novak said, “We weren’t competitive enough on value.”

This year, the chain will benefit from national advertising planned for the WingStreet sister brand, he said.

Yum Brands ended the year with 40,000 restaurants worldwide, of which about 16,000 are in the U.S.

Contact Lisa Jennings at [email protected].
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