Meet The "Force Of Nature" Propelling Yum China's Sales And Shares

When Joey Wat joined Yum! Restaurants China back in 2014, the operator of the KFC and Pizza Hut chains had had better days.  Profit growth was falling, stores needed renovating, and the global chain giant had hardly any digital business in the e-commerce-friendly country.  “People asked the question, ‘Do Chinese still like fried chicken?’” Wat recalled in a recent interview. “It was in a turnaround situation.”

Fast forward to 2019: 95% of KFC’s stores in China have been renovated, more than 1,000 have been added, and profit has improved. Yum China was spun off from parent Yum Brands and listed at the New York Stock Exchange in 2016, all helping Wat to be promoted to Yum China CEO last year. This year, at a time when mainland shares have been weighed down by slower economic growth in China and Sino-U.S. trade tension, Yum China’s stock has so far gained 21%, closing at a seven-month high of $40.52 on Tuesday.  Quarterly earnings reversed to a profit of $74 million in the three months to December, compared with a loss of $107 million a year earlier, the company said on Jan. 31.

While conceding that the environment is “very competitive,” 47-year-old Wat sees yet more growth for KFC in China, and is determined to improve Pizza Hut, too.  “Prior to her coming in, Yum China was in a challenging spot,” said Ben Cavender, a partner with consultancy China Market Research Group that works with Yum China.  Wat is “smart and focused” and “a force of nature,” he said. “They are now in a position now to grow better.”  For that success, Wat ranked No. 3 the 2019 list of top businesswomen in China published last month by Forbes China, the Chinese-language edition of Forbes.

Yum China is blessed and burdened as one of the longest-lasting foreign brands in the country. The company, founded in Corbin, Kentucky by Colonel Harland D. Sanders in 1939, first opened a KFC in the mainland in 1987, the first major global restaurant brand to enter the market.  At the end of the third quarter of 2018, led by KFC’s 5,000-plus restaurants, Yum China had more than 8,300 restaurants, ranking it as the largest restaurant business in the country and way ahead of McDonald’s and Starbucks.  Besides KFC, and Pizza Hut, Yum China operates East Dawning, Little Sheep and Taco Bell brands, along with COFFii & Joy, a new coffee concept started in China in 2018.

Wat’s career has rocketed in short time. After joining as president of KFC China, she moved up to CEO for KFC China in 2015. She became president of Yum China – overseeing not only KFC but other brands like Pizza Hut — in February 2017. She then became CEO last March. Though she grew up in Hong Kong, she highlights her hometown ties to the mainland by posting a picture of herself on her WeChat homepage as a young girl in the southeast coastal city of Fuzhou. “Back then,” she said, the tall buildings shown in the photo didn’t actually exist; it was just a background image.

Wat’s retailing background was a good match for Yum. Before joining the U.S.-based multinational, Wat in 2004-2014 worked in top U.K. posts at AS Watson of Hong Kong-headquartered Hutchison Group. Her last position there was managing director of Watson U.K., which runs Superdrug and Savers, two retail chains specialized in drug, health and beauty products that were in need of turnarounds.  That work, she said, involved about 1,500 stores and 20,000 people. “It is pretty big in the U.K,” she smiled. Yet compared to Yum China’s vast operations – it employs 450,000 workers, for instance, “it’s a different story.” Before joining Watson, Wat was a McKinsey & Co. consultant in Hong Kong.

Ironically, the self-described foodie says it wasn’t the restaurant business per se that attracted her to Yum.  “I’m attracted to the retail business, period — whether it’s food or not food. It is about people,” she said. “What really attracted me to Yum China is that it is a lot of people. Retail will always need people.”  Wat also picked the right time for a switch. “China’s fast-food industry is poised for growth, driven by structural increases in small-size households, rising urbanization and greater disposal income,” according to a recent report by Nomura Securities.

Wat, who guides Yum China from its headquarters in a busy Shanghai shopping district, sums up her business approach in eight words: “Good food, good fun, internal beauty, external beauty.”   As for the food, she said, “There’s nothing wrong with putting together very good food, leveraging our scale to serve at a very affordable price, and allowing normal people to enjoy it.”   She’s dismissive of criticism that KFC’s cuisine isn’t healthy. “There is always a certain skepticism towards KFC being healthy or not.  Actually, more than half of our items are from the oven and not from the fryer,” she said.

One example of a relatively healthy menu is KFC’s breakfast line-up; some 80-90% of items aren’t fried, she says. They include traditional Chinese favorites such as congee, rice rolls and vegetable wraps. “(Our) rice roll is a very popular product in east China,” she said.   “Anything you can eat with one hand is very convenient. It’s filling. It’s great travel food. It’s not only affordable but good.” KFC’s localized menu also includes the likes of “red bean drink with sweet fermented rice.” Wat also boasted about KFC’s coffee, which, she asserted, tastes better than many imports in China because it’s roasted inside of the country.  The upshot: KFC China sold more than 60 million cups of coffee through the third quarter of last year.

The “good fun” part of Wat’s strategy involves marketing. “There are so many different ways to do marketing. It can be very fun. Sometimes it doesn’t even make money. It’s ok,” she said.  “Sometimes you have fun, sometimes you have profit. A bit of both is good.”

On the money-losing-yet-rewarding side, Yum China since 2015 has started to do more charity, she said.  The company has donated 180 million yuan in the past decade to schools in remote areas and opened “angel” restaurants that support people with disabilities. A “4:30pm” program in Wuhan supports low-income families with childcare needs. That resonates with Wat because she’s a mother of an eight-year-old son.  “I’m a mom,” she said, seated in front of a bookshelf bearing photos of her own family.  “Nothing is more important than childcare. Not even my job.”

But, by far, the “absolutely key” marketing area for Yum China involves the digital push Wat launched with new hires after she arrived in 2014.  “Right now, 60% of media spending is in digital,” she said. The digital campaigns have expanded concurrently with China’s mobile payment wave; the company only started to accept digital payment in 2015.  “We used to have 7,000 full-time people to count the cash every day.  Today, over 80% of our take-in is in digital.  So this is only after three years,” Wat said.  Growing numbers of online buyers have paved the way for Wat to ramp up a consumer relationship management system that, between KFC and Pizza Hut, covers nearly 200 million customers – a group larger than the population of any single European country.

KFC China’s delivery business under Wat’s watch has grown quickly, accounting for 17% of sales that totaled $2.2 billion in the third quarter of 2018. Some 40% of the company’s online traffic comes from its own apps; the rest is from third-party platforms such as Alibaba-owned Ele.me.  The big percentage of business from its own apps helps brings down labor costs, she said. The company also offers music, children’s books and electronics online.

“External beautify,” another part of Wat’s credo, means in part: “How do we look after our staff.” KFC last year hired a designer to replace older uniforms. “It’s fantastic to make my staff look sharp and smart and beautiful,” Wat said.  Money spent on store renovation in the past few years cheers more than customers, she said. “When you renovate a store, the people that are the happiest aren’t the customers. It’s staff, because they work there every day, and they feel proud to work in a newly renovated store,” Wat believes.  In contrast with “external beauty,” Wat’s “internal beauty” refers to “the way you run the business.” By that standard, rising profits and an improved stock price since the spinoff in 2016 suggest that Wat has done well.

Yet Yum China is also facing macroeconomic headwinds and tough competition. In 2017, she said, the number of casual dining restaurants in China exploded. “The restaurant industry was still an area where people can invest and get some decent margin out of it,” Wat said.  Yum China’s scale helps its competitiveness by creating economics of scale in operations and room for flexible pricing.

“You can come into a KFC and spend 30 yuan and have a really good meal,” she said. “There aren’t that many national chains that can achieve that.” It’s tougher at the 50-60 yuan per person price range that Pizza Hut works in. “The challenge for us is to do it very well and still keep the heart of our customers.”  The competition is especially harder in tier 1 and tier 2 cities where the cost of housing is higher and consumers want value for money, Wat said.

Success in restaurants crucially comes back to food.  In addition to its lower-price fare, Yum China has premium items for consumers able to pay more, such as imported Japanese ice cream. Another offbeat success: Salty egg yolk ice cream. “It is a crazy idea,” Yum China’s CEO rises from her chair to enthuse, waving her arms for emphasis.  “Salt brings out the flavor in anything. It tastes quite good, trust me.” The company is also experimenting in Hangzhou, Shanghai and Beijing with a new, relatively upmarket store brand, “KPRO,” which highlights healthy items such as juices.

The speed with which Yum China introduces – and, if necessary, drops – new items helps to keep its menu fresh despite the chains’ large heft. “Every four to six weeks, we launch a new product. The best will stay, the rest will be gone,” though at KFC items that don’t last long on the first try may get another chance. “We don’t launch nationally. We don’t advertise. People will start to give us feedback.”    An up-and-coming national rollout from Pizza Hut’s Nanjing operation: steak.    “We’re going to really push on the steak platform,” she said. “We think we can do better” than rivals, she said.

Adapt as it may, Yum China can’t escape the larger currents sweeping the global economy and U.S.-China ties (see related story here.)  But Wat seems likely to continue bring her passionate, down-to-earth style to the job. “We have 450,000 people.  We have many things in common but one thing in common is that none are from a wealthy background. If your family is very rich, you probably won’t  KFC. It’s bloody hard work.”

It also seems a good bet that Yum China on her watch isn’t going to slow its search for the new and improved.  Back in 2014 when she joined KFC, Wat recalled, she was quick to dismiss the idea that Chinese were no longer interested in its fried chicken. “Chinese have been eating fried chicken for many, many, many years,” she said.  Her diagnosis of the company’s problem:  “It’s how can we do our job better.”

–Follow me @rflannerychina