Pizza Hut 2009 Annual Report Download - page 5

#1
Build Leading
Brands Across
China In Every
Signicant
Category.
Our experienced and tremendous local team led by our Vice Chairman of Yum! Brands
and President of China, Sam Su, grew our prots a whopping 25% in 2009 on top of
28% in 2008. You don’t need to be a math major (and I’m not!) to easily calculate
that’s over 50% growth in two years. The good news is that we achieved these results
even though our same store sales were slightly negative as the consumer generally
lagged China’s relatively strong economic growth. We added a record 509 new units
in Mainland China and now have nearly 3,500 restaurants that generated near
record restaurant margins of 20% in 2009. In spite of this robust prot growth, some
investors have asked: “Is Yum!’s recent relatively weak same store sales performance
in Mainland China an early indicator that something is wrong with the business or
Yum! is growing too fast?” We believe the answer is denitively NO! Let me explain.
For a little more perspective, let me step back to 2005, a year we saw same store sales
decline 3%. That year we opened up 379 new restaurants and made $211 million.
I remember some people questioned our pace of development then and the state of our
business as a result of our negative same store sales. Since 2005, we have added over
1,800 restaurants and have tripled our prots to over $600 million in the China division.
We have 3,400 KFCs with $1.4 million average unit volumes with margins of over 20%.
We also have 500 casual dining Pizza Huts with average unit volumes of $1.2 million and
margins of 19%. Given these incredible unit economics, we can open up new restaurants
with cash paybacks within 2-3 years. Our single biggest advantage is we have arguably the
nest operating team in the world that knows how to satisfy customers and make money.
In fact, over 70% of our restaurant general managers have at least a college education and
as I like to say, the rest of them are just plain smart! This tremendous store level operating
capability, combined with the fact we’ve put in a world class infrastructure, including our
own food distribution system along with one of the largest real estate and construction
teams anywhere in the world, has given us a huge competitive advantage, allowing us to
condently expand KFC into more than 650 cities and Pizza Hut into over 100 cities.
Our conclusion is our foundation has never been stronger. Today, just like in 2005,
China is predicted to be the fastest growing major economy in the world. In fact, it is
expected to grow its middle class from around 300 million today to 500 million people in
2020. Like I’ve said in the past, we will no doubt have some bumpy years, but I wouldn’t
trade our long-term position in China with any consumer company in the world.
Our strategy is to leverage our undeniable strength and compete and lead in every
signicant category that emerges in China. With KFC and Pizza Hut, we have already
established two of the most loved brands in the fast food and casual dining category
and we are now successfully developing Pizza Hut Home Service, making pizza available
with very efcient, low investment pizza carryout units. We are even creating our own
Chinese quick service restaurant chain, East Dawning, tailored to the local favorites
based on the amazing insight that Chinese people’s favorite cuisine is, believe it or
not, Chinese food! Consistent with this belief, we took a 27% stake in Little Sheep, a
Chinese hot pot concept, that already has more than 375 units and tons of potential.
The way we look at it KFC can be every bit as big as McDonald’s is in the US, ultimately
reaching 15,000+ units; Pizza Hut Casual can equal the casual dining leader in the US,
Applebee’s, achieving 2,000+ units; Pizza Hut Home Service can match delivery category
leader Domino’s in the US, achieving 5,000+ units. And East Dawning is attacking the
Chinese equivalent to the hamburger category in the US, so who knows how high is
up? I always liken our China opportunity to the days when Colonel Sanders, Glen Bell,
Dan Carney and Ray Kroc started KFC, Taco Bell, Pizza Hut and McDonald’s, creating
category leading brands in the US. Clearly, just like the founders of the brands I just
mentioned, we are the pioneers on the ground oor of a booming category in a growing
mega market. Having said this, we are constantly monitoring our returns and fully
intend to remain true to our commitment to never build ahead of our people capability
and unit economics. Our goal is to build a quality long-term business the right way.
25%
Prot Growth
in 2009
China Division Ongoing
Growth Model: 15%+
Operating Prot Growth
3