Conflict Between Yum! Brands and the Chinese Government Which Limited Yum’s! Growth in China

Conflict Between Yum! Brands and the Chinese Government which Limited Yum’s! Growth in China

Background

Yum! Brands recent explosive growth in mainland China is viewed by many to be an excellent example of how an American company and brand name can successfully enter the Chinese market. The success story is true but if one looks at the steps taken in expanding into China, one would see that this recent success is the result of many years of work and significant financial investment.

Yum! Brands Inc. is the world’s largest restaurant operator with over 33,000 outlets worldwide. The company operates five different restaurants, KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All American Food. The company was formed in 1997 when KFC, Pizza Hut and Taco Bell were spun off from parent PepsiCo creating Tricon Global Restaurants Inc. Since then, the company has acquired the Long John Silver’s and A&W All American Food chains placing the company firmly in five different quick serve market segments. After the LJS and A&W acquisitions, the company changed its name to Yum! Brands Inc. Yum! can be considered one of if not the largest competitor in the quick serve restaurant industry. With a market capitalization of over $14B, sales of over $9B, net income over $720M and cash flow over $1.1B for FY2004, the company is a cash generating machine. This cash generation is badly needed. While former parent PepsiCo provided the initial investment and placed the company in its current position, PepsiCo also left the company with a huge debt burden. In 1997, Yum!’s long term debt was $4.7B but through intense growth and the resulting revenue over the past 7 years, that debt has been reduced to just $1.7B.

Yum!’s position in the Chinese market is critical to the company’s future growth. Yum!’s top management has declared that growth in the Chinese market is the #1 priority for the company. Recent growth by Yum! in the Chinese market has been impressive but it has taken many years to reach the current level. Yum! entered the mainland Chinese market in 1987 when the first Kentucky Fried Chicken restaurant opened in Beijing. In the nearly 18 years since the first restaurant opened, Yum has opened over 1600 restaurants in over 280 Chinese cities. Much of the growth has just recently occurred in the past few years. As the Chinese economy grows, Yum! expects to grow with it but at an even faster rate. Operating profit form the Chinese operations grew by 20% over the previous year and Yum! does not see any reason why that growth rate cannot be maintained in the near future. Yum! has been positioning itself for this type of explosive growth. The Chinese management team has been working together in China for over 10 years. More importantly, the company has built its own distribution infrastructure and does not need to rely on the state run distribution systems of the previous communist era. This distributions system allows Yum to control the operations entirely, keeping costs at a minimum and being able to plan for unforeseen emergencies.

Conflict Identification

The conflict we have identified is between the Yum! and the Chinese government. Operating a business in China is not as easy as it is in the western world. The Chinese government still controls the amount of foreign investment within the country and approval must be received before any new operations can begin. However, the Chinese government has an agenda of its own when it comes to dealing with the potential investment by Yum!. To help feed the ever growing Chinese population, the government is seeking to modernize the poultry industry to increase productivity as part of an agriculture modernization plan.

On the other side of the conflict, Yum! is seeking to expand as quickly as possible. The company has been very successful lately by opening over 350 outlets in the past year alone. That pace is startling but also requires that Yum increase the supplier base and the distribution capability to maintain the operating capacity and the quality of product and service at each unit. It is best for Yum! to source its food domestically in China and the company tries to do that whenever possible. However, in some areas, the company has found it difficult to find quality products to serve to the customers and thus, importation from other provinces or from outside China is necessary.

One other significant problem Yum! is experiencing is a lack of good roadways for use by its delivery fleet. This lack of good highways is not just a result of slow modernization; it is at times the result of politics at the local or provincial levels of the Chinese government. Road improvements that are identified as necessary are not completed to prevent the importation