Eyeing China growth, Yum faces immature franchise market

Fri Oct 23, 2015 4:56am EDT
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By Adam Jourdan

SHANGHAI (Reuters) - As Yum Brands Inc (YUM.N: Quote) looks to triple its store footprint in China and revive flagging growth there, it faces a hurdle with one of its traditional growth drivers: the country's underdeveloped franchise market.

The parent of KFC, Pizza Hut and Taco Bell said this week it will spin off its dominant China business, where it aims to grow its restaurant count to 20,000 and bring in more franchise partners. Nine in 10 Yum stores worldwide are franchised.

China's franchise market, however, has been held back by food safety worries, opaque supply chains and a lack of reliable partners, meaning companies often resort to managing stores directly. This gives them more oversight, but it raises costs and potentially slows expansion.

"Franchising has always been seen as a more iffy proposition here," said James Roy, Shanghai-based associate principal at China Market Research, pointing to a lack of large-scale partners, intellectual property risks and food safety fears.

Only 7 percent of Yum's 6,900 China stores are operated as a franchise versus 91 percent outside China. Rival McDonald's Corp (MCD.N: Quote) franchises around 15 percent of its China outlets versus more than 80 percent globally.

Yum wants to raise its franchises to one in 10 of its China outlets this year. Decisions thereafter will be left up to the spun-off China unit. McDonald's is moving in the same direction, and said recently it was looking for a buyer for its 400-plus Taiwan outlets.

Franchising has long been a tool to accelerate expansion. In Yum's 2014 annual report, CEO Greg Creed wrote the firm had "the franchise capability necessary to facilitate growth."

While the franchise model works well in developed markets, where reliable supply chains ensure food quality, it has less of a track record in China, a vast emerging market where Yum is expanding at break-neck speed and where close control of supply chains is vital for success.   Continued...

Men sits outside a KFC restaurant in Beijing in this July 17, 2014 file photo.  REUTERS/Kim Kyung-Hoon/Files