Is Yum! the right flavour for China?

The CEO of McDonald’s China summed up the company’s strategy well in a recent Wall Street Journal article: “We’re not out to have the most stores in China, but we want to have the highest quality.” 

However it seems the Yum! expansionary business strategy is outperforming McDonald’s, not just in China, but in overall global operating results.  In 2011, 50 per cent of operating profit came from China, compared with 32 per cent from the US. Conversely, McDonald’s is struggling, not only in the US but also in its established outlets in China. Despite its focus on quality, McDonalds reported a fall in same-store sales in May for the wider Asia-Pacific, Middle East and Africa region, citing negative results from China. 

The President of Yum! Brands China, Zhu Zongyi, told media recently that Yum! would look to open at least 600 restaurants each year – an unbelieveable undertaking considering the work needed for research, branding, business modelling, logistics, staffing and launch activity. However, it seems as though the company is on track, with 168 new stores opening in the first quarter of 2012.

How does Yum! manage to sustain such rapid growth? According to the company, the key is hiring good talent – at all levels. Yum! Brands China CEO David Norvak recently told the Wall Street Journal: “Our whole formula for success in China has been geared on a great local management team with phenomenal local operating capability. And we’ve always had one rule, we never want to expand any further than, or faster than, our people capability. Because we’ve got these brands that are so good, we just want to keep polishing the diamond. Ninety percent of our restaurant managers in China have at least a college education.”

Granted, the ability to have a large dedicated team focused on development might be unrealistic for many smaller Thai companies looking to offset a slowdown in their traditional market base by further Chinese expansion. However, the principles remain the same – organise a dedicated expansionary and business development team and you will reap the rewards.

Many smaller businesses may be wise to leverage growth as a supplier to a larger business expanding throughout China, or with local importers or distributors assisting the big brands. For example, high-quality farmed Thai chicken or Hom Mali rice could be sold to Yum! Brands or its suppliers to support expansion into southern China. I know of at least one Chinese fast-food franchise, Kungfu, which already claims to use Hom Mali rice. Its franchised restaurants are mainly based in Guangdong province, but there are restaurants located in major cities in other areas, such as Shanghai and Beijing.

 Thailand’s government should support Thai companies looking to supply the Chinese market in such  a fashion, as with greater production comes increased employment, particularly in provinces outside Bangkok. 

McDonald’s isn’t really “losing” – it’s just not winning as much as Yum!. Both Chinese business strategies have benefits. McDonalds’ conservative strategy, based on large metropolitan and Eastern seaboard markets, is in response to the current global economic environment, and I believe it will still ensure strong profits in the long term. On the other hand, Yum!’s determination for first-to-market status is already reaping benefits. How it sustains its expansion will be the key, and highly reliant on China’s future economic growth. 

Time will tell which company wins in its race for long-term success and profits in China. Meanwhile, Thai companies should be watching closely for lessons they can apply to their own Chinese strategies. 

 

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