Eyeing China growth, Yum faces immature franchise market

Parkson Retail Asia

23/10/2015 09:21

* Franchise business model is largely untried in China 
    * Firms tend to directly manage to ensure food safety, 
quality 
    * Yum may look beyond mainland for potential franchise 
partners 
 
    By Adam Jourdan 
    SHANGHAI, Oct 23 (Reuters) - As Yum Brands Inc  YUM.N  looks 
to triple its store footprint in China and revive flagging 
growth there, it faces a hurdle with one of its traditional 
growth drivers: the country's underdeveloped franchise market. 
    The parent of KFC, Pizza Hut and Taco Bell said this week it 
will spin off its dominant China business, where it aims to grow 
its restaurant count to 20,000 and bring in more franchise 
partners. Nine in 10 Yum stores worldwide are franchised. 
 urn:newsml:reuters.com:*:nL3N12K3RP  
    China's franchise market, however, has been held back by 
food safety worries, opaque supply chains and a lack of reliable 
partners, meaning companies often resort to managing stores 
directly. This gives them more oversight, but it raises costs 
and potentially slows expansion. 
    "Franchising has always been seen as a more iffy proposition 
here," said James Roy, Shanghai-based associate principal at 
China Market Research, pointing to a lack of large-scale 
partners, intellectual property risks and food safety fears. 
    Only 7 percent of Yum's 6,900 China stores are operated as a 
franchise versus 91 percent outside China. Rival McDonald's Corp 
 MCD.N  franchises around 15 percent of its China outlets versus 
more than 80 percent globally. 
    Yum wants to raise its franchises to one in 10 of its China 
outlets this year. Decisions thereafter will be left up to the 
spun-off China unit. McDonald's is moving in the same direction, 
and said recently it was looking for a buyer for its 400-plus 
Taiwan outlets.  urn:newsml:reuters.com:*:nL3N0ZB1M7 
    Franchising has long been a tool to accelerate expansion. In 
Yum's 2014 annual report, CEO Greg Creed wrote the firm had "the 
franchise capability necessary to facilitate growth." 
    While the franchise model works well in developed markets, 
where reliable supply chains ensure food quality, it has less of 
a track record in China, a vast emerging market where Yum is 
expanding at break-neck speed and where close control of supply 
chains is vital for success. 
    "We have not been approached by Yum to help them expand in 
mainland China. Even if we had, we would be very cautious. We 
don't have the resources and capability," said a senior 
executive at Taiwan's Uni-President China Holdings Ltd 
 0220.HK , who didn't want to be named.  
    He noted China is a "tough market" with a focus on food 
safety, fast rising wages and steep rental costs. 
     
    LOOKING BEYOND THE MAINLAND 
    Picking the right partners will be key for Yum to navigate 
through its toughest period yet in China, where it has been hit 
by damaging food safety scares, slowing economic growth, rising 
competition from local rivals and its own marketing blunders. 
    "There's no lack of Chinese entrepreneurs willing to invest 
in a franchised store, but few are competent to manage it," the 
U.S. Department of Commerce has warned American firms. 
    This might mean Yum will need to scout beyond mainland 
China. It already has ties with Jardine Matheson Holdings Ltd 
 JARD.SI , which runs franchises for Pizza Hut and KFC in Hong 
Kong, Macau and Taiwan. 
    Other potential partners could include Uni-President; 
Singapore's BreadTalk Group Ltd  BRET.SI , which operates Carl's 
Jr outlets in China; and China F&B Group, which has links with 
Papa John's International Inc  PZZA.O  and Berkshire Hathaway 
Inc's  BRKa.N  ice cream outlet Dairy Queen. 
    Locally, Beijing Hualian and China Resources Corp help run 
outlets for international brands. 
    Or, says Bernstein analyst Sara Senatore, Yum could opt to 
go it alone. "China still generates plenty of cash and its brand 
and supply chain have a very broad reach. So from a practical 
standpoint, it doesn't need franchisees to expand," she said. 
    Coffee giant Starbucks Corp  SBUX.O  has reduced its 
reliance on franchised stores in China, now directly managing 
around 60 percent of its outlets compared to just 11.5 percent a 
decade ago. 
    The balance for Yum to consider is: would the pace of growth 
be worth the risk of losing control over food safety - a 
sensitive issue for Chinese diners fed on a diet of horror 
stories from recycled "gutter oil" to decades-old "zombie meat". 
    "If there were any question marks at all over the integrity 
or trust of the franchise partner, it would make me even more 
worried than now," said Li Mengxin, a 22-year-old student in 
Shanghai. 
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
Yum's China spin-off puts new spotlight on risk     urn:newsml:reuters.com:*:nL1N12K2MM 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Reporting by Adam Jourdan, with additional reporting by Faith 
Hung in TAIPEI, Lisa Baertlein in LOS ANGELES and Donny Kwok in 
HONG KONG; Editing by Ian Geoghegan) 
 ((adam.jourdan@thomsonreuters.com; +86 21 6104 1778; Reuters 
Messaging: adam.jourdan.thomsonreuters.com@reuters.net)) 
 
Keywords: YUM! BRANDS RESTRUCTURING/FRANCHISE