KFC Hits Home Run in China

China's relentless appetite for the colonel's chicken has KFC (search) on a building boom in the world's most populous country, with 1,200 locations, soaring profits and a menu that mixes in bamboo shoots and lotus roots.

At a time when its sales in the United States are struggling, KFC is dominating even rival McDonald's (MCD) in China and turning the goateed visage of Kentucky Fried Chicken founder Colonel Harland Sanders (search) into a ubiquitous symbol of America.

"We are really positioned as a part of the fabric of life in China," said David Novak, chairman and chief executive of Louisville-based Yum Brands Inc. (YUM), parent company of KFC.

Yum's operating profits in China exceeded $200 million in 2004 — more than half the company's burgeoning international profits. And the pace of 275 locations opened in the country last year is expected to be matched in 2005.

Sam Su, president of Yum's China division, called China "the ultimate marketplace." He predicted that as the Chinese economy grows, it will someday surpass the number of KFC restaurants in the United States, where there are 5,453 stand-alone locations and 1,277 multibrand outlets featuring other Yum brands.

"In many parts of China, the local municipal governments actually view the arrival of a KFC as a sign of the city coming of age," Su said in a phone interview from China.

A restaurant industry analyst said KFC's recipe for success in China includes a solid business plan guided by a management team intact for years.

"For many companies, China is a hope and a dream — maybe a very realistic hope and a dream — but for Yum it's reality today," said Joe Buckley with Bear Stearns & Co. "It's an important piece of the company that still has plenty of growth potential ahead of it."

Yum's China operations represented about 15 percent of the company's operating profits in 2004, a figure expected to reach about 18 percent this year, Buckley said.

He said Chinese fast-food consumers' preference for chicken has contributed to KFC's success: "It's an advantage to be the chicken brand, given that scenario."

KFC consumers in China can dig into buckets of original recipe chicken, but KFC has tailored some dishes specifically to Chinese tastes. There's a twister sandwich styled after the way Peking duck is served, but with fried chicken inside along with cucumber shreds. Instead of cole slaw, which never caught on in China, customers can order seasonal vegetables. In spring, it's bamboo shoots; in summer, lotus roots are on the menu. And in colder months, there's rice porridge and winter soup.

Other Yum brands also are vying for Chinese customers. The company opened at least 39 Pizza Hut restaurants in China last year, for a total of 146 outlets, and Su predicts a bright future for the chain.

"With the rising income and economic growth, there's no reason to doubt that Pizza Hut will be a huge brand," he said.

Taco Bell is testing a casual dining format in China, and Yum is even dabbling in Chinese fast-food with one test restaurant in Shanghai.

"We are working on a model that hopefully can work across China," Su said of Yum's Chinese fare. "If that happens, it's going to be a huge business opportunity."

But KFC is clearly at the forefront of Yum's expansion. More than 100 KFC restaurants have sprung up in both Beijing and Shanghai. The chain has spread to every Chinese province and region except Tibet. KFC restaurants have reached 280 Chinese cities, compared to just 20 cities in 2000. Yum's revenues in China topped $1 billion last year, up from $261 million in 1998.

Elsewhere around the globe, KFC opened about 50 new restaurants last year in Britain, another high-growth market for Yum, raising its total chicken outlets to 660.

Yum had operating profits of $116 million in Britain and $55 million in Asian markets excluding China last year, with KFC representing 60 percent of the amount.

In the United States, KFC has struggled in a crowded fast-food sector, including burger chains that have added chicken to their menus. KFC's domestic same-store sales have trended mostly downward the past two years, though Novak predicts a 1 percent to 2 percent uptick in 2005.

In China, KFC has outpaced rival McDonald's Corp., which has its own expansion plans. McDonald's has more than 600 restaurants in China and plans to open about 100 more this year, comparable to 2004. Its long-range plans call for 1,000 restaurants in China by 2008.

"We're very bullish on China," said spokesman Walt Riker. "We're aggressively expanding the business."

McDonald's sells a "significant amount of chicken" in China, but also offers beef, pork and fish, giving Chinese customers "unique choice and variety," Riker said.

Most KFC restaurants in China are either company-owned or joint ventures involving the chain. The company is looking to recruit more franchisees, Su said, but added, "we are expanding faster than we are able to find good franchisees."

Novak said Yum has a big head start over its competitors in China and intends to build on that advantage. "We are truly walking the talk in terms of taking this market," he said.

With its growth in China, the brand has come a long way since Sanders perfected his original recipe, with a secret blend of 11 herbs and spices. The colonel's face now is displayed on signs and KFC packages across China, though hungry customers might be fuzzy about exactly who he is.

"I think most people would recognize he's an old gentleman who developed some great recipe of food and was the founder of KFC," Su said.