Yum Brands boasts banner quarter as McDonald's seeks to grow franchising

Yum Brands Inc saw a strong recovery in China in the first quarter, while McDonald's Corp is speeding up its franchising operations in the country to catch up with Yum's market share.

Yum Brands' China sales increased 17 percent in the first quarter compared with the same period of a year ago, with 7 percent unit growth and 9 percent same-store growth. Its restaurant margin increased 6.8 percentage points to 23.4 percent. Operating profit rose 80 percent.

The momentum was encouraged by Yum's recent menu revamp, featuring the launch of 15 new products and a strong performance of its Pizza Hut subsidiary, according to a financial report released on April 22.

Gao Jianfeng, general manager at Shanghai-based Bogo Consultants, said Yum's improvement from last year was aided by increased customer traffic to Pizza Hut during the Spring Festival, a peak season for gatherings with colleagues, friends and family.

"The government austerity campaign that has pushed customers to more casual and lower-end restaurants also stimulated the sales at such restaurants as Pizza Hut," he said.

Last year, Yum's busineses were affected by food security issues brought on by a poultry supply incident, avian flu and a sluggish catering climate. Same-store sales were down 15 percent in 2013 in China, resulting in Yum's China operating profits decreasing 26 percent.

David Novak, chairman and CEO, said Yum Brands is clearly on its way to a strong bounce-back year, delivering first-quarter growth of 24 percent. Operating profit grew 80 percent in China, driven by strong sales and margin growth.

Novak said at least 700 new restaurants are expected to open in China this year. The company opened 123 new units in the first quarter. Its total number of restaurants in China, including KFC, Pizza Hut, East Dawning and Little Sheep, totaled 6,332. About 278 units of KFC are franchised in China, with 3,569 directly operated by the company at the end of 2013.

Zeng Qishan, chief executive officer for Yum rival McDonald's China, told media at a launch event on April 18 that the company will increase its franchise proportion to as much as 25 percent of its stores in China by 2015, up from the current 12 percent.

Last year, the company opened 276 new stores in China and expects to see another 300 new stores open this year.

On April 22, McDonald's Corp announced results for the first quarter ending March 31, with comparable sales up 0.8 percent and operating income down 10 percent in the US, Asia Pacific, the Middle East and Africa.

McDonald's is now focusing on stabilizing key priority markets, including the US, Germany, Australia and Japan.

Despite being the world's leader in fast-food chains, McDonald's lags behind KFC in the number of stores it has in China. Industry experts consider its plan to now expand in China through franchising to have missed the boat.

Zeng said it took 18 years for McDonald's to open its first 1,000 stores but only five years for its second 1,000 stores in China.

He said it is concentrating on first-tier cities with a focus on franchising. Globally, its franchise ratio is 80 percent, but on the Chinese mainland, it is only 12 percent.

"McDonald's locations in second- and third-tier cities are losing to those of KFC, but that the new franchising push should quickly boost its presences in China.," said industry analyst Gao.