Let me now address KFC China, which was obviously our biggest challenge last year. Specifically, we are in the process of overcoming two issues that significantly impacted KFC sales in 2013: negative publicity from the poultry supply incident in late December 2012 and subsequent news of Avian Flu. Here are some of the major actions we took in 2013 to strengthen our KFC business in China.
First, in an effort to build and reinforce positive consumer perceptions around the safety of our food, our ongoing “Operation Thunder” initiatives strengthened our poultry supply chain. I assure you, we are always in the process of improving our supply chain. We also introduced a powerful quality assurance campaign called “I Commit.”
As a result, we are happy to see significant progress in rebuilding trust at KFC, with our key brand attribute scores now nearly back to where they were in 2012.
While we experienced significant sales deleverage at KFC, the China team deserves a lot of credit for doing an excellent job managing costs. We sharpened our ability in the areas of sales forecasting, labor scheduling and how best to optimize service levels with fewer labor hours. This capability will help us drive profitability going forward.
Now, as I’ve always said, the bedrock of our success in China has been our outstanding restaurant operations, which are getting stronger and stronger. In 2013, we hired over 8,000 new management recruits into our Whampoa Management Training Academy because we’ll be opening thousands of new restaurants in the years ahead. Nearly 100% of our restaurant managers have a college degree, and about 50% of our restaurant team members are university students.
With world-class operations as our foundation, we opened 428 new KFCs this past year and now have almost 4,600 KFCs in over 900 cities in China…that’s more than twice the size of our nearest competitor. KFC also has the largest home delivery business in China, with 70% of our delivery orders being placed online. As a testament to our success, we were named the #1 foreign brand in China in a 2013 report published by the BBC. There’s no doubt KFC has been, and continues to be, a power brand.
Our focus now is to bring more innovation and energetic news to our customers. In fact, we have an aggressive and comprehensive plan to restage the KFC brand in the second quarter, which includes breakthrough innovations in our products, menu management, marketing calendar, advertising and the digital customer experience. Overall at KFC China, we know we still have work to do but we’re confident we are making progress rebuilding trust with consumers and improving same-store sales.
PIZZA HUT CASUAL DINING CHINA
For Pizza Hut Casual Dining, 2013 was a strong year as we grew same-store sales by 4% and opened 247 new restaurants, surpassing the 1,000 unit milestone. With over 1,000 units in 277 cities, we are clearly the number one western casual dining chain, with a 6:1 lead over our nearest competitor.
Pizza Hut Casual Dining is arguably one of the greatest success stories in our industry. In the last three years, we have more than doubled our store count, grown average unit volumes by 30% and achieved home-run economics with restaurant margins above 20%.
Pizza Hut Casual Dining goes well beyond pizza as almost two-thirds of sales are non-pizza items. We also continue to leverage our assets throughout the day and have expanded our breakfast offering into over 120 restaurants. This is a huge opportunity for us as our long-term goal is to create and own the midscale casual dining breakfast occasion in China on a scale that matches what exists in the U.S. today. In fact, we will be expanding breakfast into an additional 200 units in 2014.
All this is leading to an amazingly strong economic model that generates two-year cash paybacks on new unit openings, so it’s full speed ahead for our Pizza Hut Casual Dining new unit development and expanding into lower-tier cities.
PIZZA HUT HOME SERVICE CHINA
Now, the other thing that’s exciting about China is our Pizza Hut Home Service business, or home delivery. Pizza Hut Home Service now has over 200 units in 25 cities and is the only “All Meal” replacement delivery brand in China. Forty percent of our menu consists of Chinese food. So not only are we delivering pizza, but we’re also delivering a full array of Chinese menu options. We now have a proven economic model which positions us to begin to scale this brand rapidly across the country.
EAST DAWNING AND LITTLE SHEEP
Along with Pizza Hut Home Service, we have two other emerging Chinese food concepts in China that give us the confidence we will eventually become a dominant player in the massive Chinese food category. We are developing our own Chinese fast food concept, East Dawning, and are now testing it in lower-tier cities. Admittedly, this is taking longer than we expected, but we believe our persistence will pay off.
The same could be said for Little Sheep, the concept we acquired in 2012 because it is the leader in the extremely popular hot pot category. While we’ve had some major setbacks and are working hard to improve the concept, we remain optimistic this brand will become a significant growth driver down the road.
NEW UNITS IN CHINA
Of course, the biggest opportunity we have in China is to penetrate the country with new restaurants. Looking at China’s new unit development in total, we strengthened our category-leading positions with 740 new restaurants in 2013, exceeding our target of at least 700 new units for the year. Going forward, we expect another strong year of development in 2014 with plans to open at least 700 new units as we continue to deploy capital into these high-return investments.
Remember, Yum! currently has four restaurants per million people in China, where the consuming class is expected to grow from 300 million people just a couple of years ago to over 600 million by 2020. This compares to 58 restaurants per million people in the U.S., where the consuming class is over 300 million people today. Clearly, we’re on the ground floor of global growth.
Make no mistake, we wouldn’t trade our position in China with any other restaurant company in what remains the #1 retail opportunity in the world.