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Yum Brands is the largest fast-food operator in China and its business here played a crucial role in its first-quarter earnings. (Eugene Hoshiko/Associated Press/Eugene Hoshiko/Associated Press)
Yum Brands is the largest fast-food operator in China and its business here played a crucial role in its first-quarter earnings. (Eugene Hoshiko/Associated Press/Eugene Hoshiko/Associated Press)

KFC, Pizza Hut push deeper into China Add to ...

The Colonel's secret recipe in China has more to do with egg tarts and breakfast fritters than how he spices his chicken.

The KFC menu in China is heavily adapted to local tastes - think rice dishes and hot soy milk alongside the classic fried chicken and hot wings. The variety of offerings - along with a ubiquitous market presence - has helped the chain take off in China.

Now Yum Brands Inc., KFC's parent company, is trying to fend off competition from domestic rivals and foreign competitors like McDonald's Corp. by buying up a popular hot-pot chain, Little Sheep. Their preliminary offer for the Inner Mongolia-headquartered chain is still subject to regulatory approval, but if successful would add nearly 500 more restaurants to their China fold, which now includes more than 3,800 KFC and Pizza Hut locations.

The move shows the importance of the Chinese market for fast-food chains that are struggling at home. Yum Brands is the largest fast-food operator in China and its business here played a crucial role in its first-quarter earnings this year. Worldwide operating profit was up 5 per cent, thanks largely to 18-per-cent growth in China, even as profit dropped 13 per cent in the United States.

"Our China business continues to fire on all cylinders," Yum Brands chairman and chief executive officer David Novak said in a statement accompanying the earnings report. "Looking ahead, our international performance and trends are strong, and new unit development is robust. We expect the continued strength of both our China and [Yum Brands International]businesses to overcome a challenging year in the U.S."

KFC and Pizza Hut are not alone in their ambitious plans for China. McDonald's - the No. 3 fast-food chain in China - has just announced plans to open 700 new outlets in China by 2013, bringing its total to 2,000, as well as to hire 50,000 new employees, including 1,000 university graduates for a management training program.

"McDonald's is expanding faster in China than in any other market in the world, so this is the right time for talented individuals to join our winning team," Kenneth Chan, CEO of McDonald's China, said in a statement.

Here in China's capital, KFC and McDonald's are often found within a block or two of each other, each lobbying for the same clientele.

"During lunchtime it's very crowded here," said Gao Yuan, 31, an accountant lining up at KFC to grab a quick chicken burger and cola before heading back to work. Her colleague Summer Zhang, 26, said the chain is popular for its special featured items, which on this day includes a bacon-chicken-mushroom dish on rice. "People here move very fast and they like eating here because it's so convenient," she said.

Ms. Gao and Ms. Zhang are among an estimated 15.3 million urban Chinese who eat fast food once a day, according to statistics compiled by retail analytics firm Access Asia. By their findings, China saw 48 billion fast-food transactions in 2010, each with an average value of 21.22 yuan or about $3.22 (U.S.).

"I think many companies, particularly U.S. companies, are looking to China as a route to future growth and looking to China as potentially becoming their biggest market," said Access Asia director Matthew Crabbe, who added that Yum Brands has benefited from having been first into China and from successfully tailoring its menus to fit local tastes, in a way that McDonald's has not been able to replicate. Chicken, he said, has been on Chinese plates for hundreds of years. Beef burgers? Not so much.

"It's not just fast-food companies. Look at Coca-Cola and the Chinese brands they are developing, the tea drinks. … It's very much about developing a local presence, a local brand, so it becomes like a Chinese company and not an American company."

In keeping with that approach, analysts said Little Sheep is a natural acquisition for Yum Brands, adding to its range without drawing customers away from its existing restaurants. Little Sheep also has a reliable supply network for its hot-pot dishes, which consist of meat and vegetables dunked in boiling, flavoured broth.

"Little Sheep does a better job of standardization than its competitors. It has its own sheep farm in Inner Mongolia, so it can control the quality of the ingredients; it also has its own factory where it makes its own seasonings. So that's why it can deliver a consistent consumer experience," said Jing Bing, an assistant professor of marketing at Beijing's Cheung Kong Graduate School of Business.

"This is a very wise move for Yum Brands to gain better control and expand more in China."

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