Pizza Hut 2007 Annual Report Download - page 5

3
Our China Division
generated $375
million in operating
profit — that’s
amazing 30%
growth in 2007!
make Pizza Hut available in 77 cities. We have one of the largest real estate and construc-
tion teams of any retailer in the world that opened 471traditional restaurants in 2007 as we
continue to grow ourpeople capability ahead of the business by recruiting and retaining
talent with highly sought after, well-paying jobs.
Ialways liken our China opportunity to the days when Colonel Sanders, Glen Bell,Dan
Carneyand RayKroc started KFC, Taco Bell, Pizza Hut and McDonald’s, creating
category-leading brands in the U.S. that today regularly serve 300 million consumers at
over 30,000 U.S. restaurants. Consider these two factoids: 1) recent government studies
suggest that the middle class in mainland China now numbers over 250 million people, the
equivalent to the entire U.S. population in 1990, at which time the U.S. QSR industry was
already very well established; and 2) there are 547million cell phone subscribers in China,
which underscores how rapidly the consumer base is embracing new technology and con-
cepts. Clearly,just like the founders of the brands Ijust mentioned, we are the pioneers on
the ground floor of abooming category in agrowing mega market. We fully expect to win
big by capitalizing on the total opportunity.
Tous, winning big in China means building leading brands in every significant category. So
in addition to KFC and Pizza Hut casual dining, we are now successfully developing Pizza
Hut Home Service which already has 23 units in Shanghai and is now beginning national
expansion to meet the growingdemand for convenient meals at home given the rise of
dual income households. We’ve also generated a lot of local consumer excitement by
creatingourown quick-service restaurant chain, East Dawning, tailored to the local favorites
of theChinese customer. Obviously, Chinese people’s favorite food is Chinese cuisine, so
we are offering delicious, affordable, convenient Chinese food in appealing facilities that
differentiate us from local competition. We continue to enhance the concept and are making
dramatic progress improving our unit economics, especially with sales increases from the
launch of television advertising. Our team is confident that we will make East Dawning asuc-
cess and believe it could be our highest potentialconcept given the obvious broad appeal of
Chinese food in China. Believe me, the concept is getting betterand betterevery time Isee
it in my frequent visits to China and I’m a believer!
Ioften get asked the question of how big we think we can be in mainland China. Ourbest
long-range forecast is over 20,000 restaurants. The way we look at it, KFC can be every
bit as big as McDonald’sis in the U.S., ultimately reaching 15,000+ units; Pizza Hut Casual
Dining can equal the casual dining leader in the U.S., Applebee’s, achieving 2,000+ units;
Pizza Hut Home Service can match category-leading Domino’s in the U.S., achieving
5,000+ units; and East Dawning is attacking the Chinese equivalent of the U.S. hamburger
category— so who knows how high is up? The unarguable conclusion based on the
opportunitywesee on hand is that we are in the first inning of anine inning ball game.
We have a great lead, and plan on winning big!
Ialso often get asked: what can go wrong? Well, in the past five years, we’ve had chal-
lenges like dealing with SARS, the threat of Avian Flu, and an ingredient supply issue, with
each having significant short-term negative impacts. In each case we bounced back stronger
than before. One thing I’m sure of is we will certainly have our challenges ahead, but I’m
generated 12% samestore sales growth. We have also developed target manufacturing
capability for ourproprietary dessert line of egg tarts and pizza dough making. And we