Pizza Hut 2005 Annual Report Download - page 4

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We฀are฀the฀undeniable฀leader฀in฀this฀booming฀country.
Given฀the฀fact฀we฀already฀have฀the฀dominant฀brands฀in฀
quick฀service฀with฀over฀1,900฀KFCs,฀and฀in฀casual฀dining฀
with฀over฀300฀Pizza฀Huts,฀last฀year฀we฀featured฀our฀China฀
business฀on฀the฀cover฀of฀our฀annual฀report.฀
฀฀฀฀฀฀฀฀Well,฀have฀you฀ever฀heard฀of฀the฀Sports฀Illustrated฀cover฀
“jinx”฀where฀a฀world฀class฀athlete฀is฀featured฀on฀SI’s฀cover฀
and฀then฀has฀a฀difficult฀time?฀As฀chance฀would฀have฀it,฀the฀
same฀thing฀happened฀to฀our฀world฀class฀China฀business!฀
After฀having฀a฀record฀first฀quarter,฀we฀had฀an฀unfortunate฀
supplier฀issue฀with฀a฀KFC฀ingredient฀that฀should฀not฀have฀
been฀in฀our฀food฀supply.฀While฀no฀customer฀was฀harmed฀
in฀any฀way,฀it฀created฀a฀gigantic฀amount฀of฀negative฀pub-
licity฀that฀resulted฀in฀a฀very฀significant฀decline฀in฀sales.฀
Given฀the฀strength฀of฀the฀KFC฀brand,฀we฀steadily฀built฀back฀
our฀business฀only฀to฀have฀major฀publicity฀about฀avian฀flu฀
raise฀concerns฀later฀in฀the฀year฀about฀eating฀chicken.฀Even฀
though฀all฀the฀experts฀agree฀that฀properly฀cooked฀chicken฀
is฀perfectly฀ safe฀to฀eat,฀perceptions฀are฀ reality฀and฀ our฀
sales฀took฀another฀steep฀decline.฀Despite฀the฀adversity,฀
we฀slightly฀grew฀profits฀to฀$211฀million฀and฀opened฀up฀a฀
record฀409฀new฀units,฀continuing฀to฀widen฀our฀gap฀versus฀
McDonald’s.฀That’s฀because฀we฀continued฀to฀have฀higher฀
volumes฀and฀higher฀margins฀than฀our฀competitor,฀yielding฀
tremendous฀ unit฀ economics฀ with฀ returns฀ that฀ continue฀
to฀be฀well฀above฀our฀cost฀of฀capital.฀The฀result฀is฀that฀we฀
were฀ able฀ to฀ withstand฀ two฀ unexpected฀ negative฀ sales฀
events฀and฀still฀maintain฀a฀business฀with฀powerful฀new฀unit฀
economics.฀KFC฀continues฀to฀be฀one฀of฀the฀strongest฀con-
sumer฀brands,฀if฀not฀the฀strongest,฀in฀China.฀Pizza฀Hut฀also฀
has฀first฀mover฀advantage฀with฀no฀other฀substantial฀chain฀
competitor฀in฀the฀casual฀dining฀segment.
I’m฀often฀asked฀how฀we฀developed฀such฀a฀tremendous฀฀
China฀business.
Well,฀consider฀these฀powerful฀competitive฀advantages.฀
It฀starts฀with฀an฀outstanding฀tenured฀local฀Chinese฀team฀
that฀has฀worked฀together฀for฀over฀ten฀years฀building฀the฀
business฀from฀scratch.฀In฀fact,฀we฀believe฀our฀China฀opera-
tions฀are฀the฀best฀in฀the฀world.฀We฀uniquely฀own฀our฀own฀
food฀distribution฀system฀that฀gives฀us฀coverage฀in฀every฀
major฀province฀and฀has฀allowed฀us฀to฀expand฀into฀over฀360฀
cities.฀We฀also฀have฀one฀of฀the฀largest฀real฀estate฀develop-
ment฀teams฀of฀any฀retailer฀in฀the฀world.฀Given฀our฀rapid฀
growth,฀we฀now฀have฀a฀major฀national฀advertising฀budget฀
that฀is฀building฀brand฀awareness฀and฀loyalty.฀
This฀investment฀in฀infrastructure฀and฀scale฀has฀given฀
us฀a฀tremendous฀head฀start฀to฀tap฀into฀an฀unprecedented฀
opportunity.฀The฀Chinese฀middle฀class฀already฀represents฀
300฀million฀urban฀customers฀who฀ can฀afford฀our฀food.฀
That’s฀larger฀than฀the฀entire฀ U.S.฀ population.฀ Make฀no฀
mistake,฀we฀are฀at฀the฀ground฀floor฀of฀a฀booming฀cate-
gory.฀That’s฀why฀I฀always฀liken฀it฀to฀over฀forty฀years฀ago฀
when฀pioneers฀Colonel฀Sanders,฀Glen฀Bell,฀Dan฀Carney฀
and฀Ray฀Kroc฀started,฀respectively,฀KFC,฀Taco฀Bell,฀Pizza฀
Hut฀and฀McDonald’s฀in฀the฀United฀States,฀building฀ the฀
quick฀service฀restaurant฀category฀from฀scratch.฀
Well,฀we฀are฀the฀pioneers฀in฀China฀and฀we฀fully฀intend฀
to฀capitalize฀on฀the฀total฀opportunity.฀We฀have฀the฀bold฀
goal฀to฀build฀dominant฀restaurant฀brands฀in฀every฀signifi-
cant฀category.฀So฀in฀addition฀to฀KFC฀and฀Pizza฀Hut฀casual฀
dining,฀we’ve฀begun฀to฀expand฀Pizza฀Hut฀Home฀Service฀
Delivery.฀Just฀like฀ in฀ the฀ U.S.,฀at-home฀convenience฀is฀
in฀ the฀ sweet฀ spot฀ to฀ appeal฀ to฀ the฀ time฀ constrained฀
customer.฀We฀are฀on฀the฀forefront฀of฀this฀trend฀with฀our฀
pizza฀delivery฀service.฀Our฀team฀is฀also฀energized฀by฀the฀
early฀consumer฀acceptance฀of฀East฀Dawning,฀which฀is฀a฀
Chinese฀fast฀food฀concept฀we฀have฀created฀to฀provide฀the฀
everyday฀local฀favorite฀foods฀of฀Chinese฀customers.฀We฀
are฀offering฀an฀affordable฀great-tasting฀menu฀in฀appeal-
ing฀ facilities฀ that฀ separate฀ us฀ from฀ local฀ competition.฀
Build฀Dominant฀฀
China฀Brands
#1
Units฀in฀Mainland฀China
as฀of฀December฀31st
*฀Does฀not฀include฀China฀Division’s฀
Taiwan฀or฀Thailand.
McDonald’sYUM
1,792*
735 Our฀China฀business฀฀
continues฀to฀deliver฀significantly฀
higher฀volumes฀and฀higher฀฀
margins฀than฀our฀฀
global฀competitors.
2.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.