How Yum! Brands Is Conquering the World

The Pepsi spin-off—owner of KFC, Pizza Hut, and Taco Bell—has grown so fast in China, Russia, India, and elsewhere that it's now bigger than McDonald's

By Stephen Foley

The Colonel's army is on the march. Vast swathes of China have fallen under his dominion, and he is making inroads in India and Russia. It is one of the great American conquests of our time: the Kentucky Fried Chickenification of the middle classes in the world's emerging economies. And it all means that KFC's parent company, Yum! Brands (YUM), which also owns Pizza Hut and the Mexican food outlet Taco Bell, has earned the exclamation mark on which it insists.

With 37,000 restaurants in 110 countries, Yum! even eclipses that more famous icon of American colonisation, McDonald's (MCD), to rank as the world's largest restaurant chain in terms of numbers of outlets. For Yum! the task is to forge onward in this virgin territory, but also to shore up its gains against the hungry McDonald's and other fast-food giants, all the while trying to keep the home fires burning back in the US, where sales are challenging because consumers are watching their wallets and their waistlines. The 23 years since Yum! opened its first KFC in China near Beijing's Tiananmen Square provide a masterclass in overseas expansion. Its success to date has tempted a hundred imitations and whose progress in the future will be one of the most closely watched stories in corporate America.

"Yum!'s is an amazing story about how they conquered China so much earlier than their main rivals," says RJ Hottovy, an analyst at Morningstar. "Part of the reason is that they built up their supply chain and their distribution system quickly, and that is giving them a real competitive advantage. When you are setting up restaurants in new territories it is often difficult to procure packaging and to develop good relationships with suppliers, but Yum! now has a nice little edge."

China has become so important to Yum! that it now splits its sales there into a separate division ranking equal to its US market. Last year, 33 per cent of its operating profits came from China, nudging the 38 per cent from the US, and it sees much greater potential still. Adding in Pizza Hut, which is pitched as a mid-market family dining experience in China, there will be 475 new Yum! outlets in there this year, on top of the record 509 added last year.

There are almost three times as many KFCs now in mainland China as there are McDonald's restaurants, which opened its doors there just three years later, in 1990. Mr Hottovy says competition is hotting up, however. "At the time that Yum! was accelerating in China, McDonald's was working on a turnaround in the US, but since that has been completed, it has turned its attention to international expansion in a big way and is planning to double its presence in China, so the competition for Yum is going to be increasing," he said.

"McDonald's, with its well-known brand, its advertising and its scale, will be a major player. But there is room for both. This is all about the rise of the middle-income consumer in China that is fuelling the growth, the story that we hear so much about."

All of the Yum! brands are storied American companies. KFC was founded by Harland Sanders in 1952, when he was already an established Kentucky businessman and had earned the title "Kentucky Colonel" for his services to the state. Pizza Hut traces its history back almost as far, and the younger Taco Bell, whose growth has mirrored the growth of the Mexican community and the popularity of its cuisine, was founded in 1962. The three chains were pulled together by Pepsi (PEP), the drinks-maker, which ran a restaurant division until 1997, when it decided to spin off the lot.

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