Yum! Brands CEO: Innovation and value necessary for today's economy

During today's keynote address at the Bank of America Merrill Lynch Consumer & Retail Conference, Yum! Brands CEO and chairman David Novak offered some insight on the current competitive environment in the quick-service industry.

"People want to have confidence now, but I don't think they necessarily have it; nobody's taken a victory lap," he said.

The competitive environment is particularly heavy in the U.S., where business has been affected by payroll taxes, higher gas prices, weather, etc. during Q1 alone. To maintain an edge, Novak said a company has to have value and innovation.

"The U.S. is the most competitive market we have anywhere in the world and if you don't play your 'A' game, a game of value and innovation, you're going to end up losing," he said.

Value and innovation are the reasons Taco Bell had such a successful 2012 and momentum into 2013.

"One reason we're confident about Taco Bell is because it has everyday value and innovative platforms. If we didn't have Cantina Bell and Doritos Locos Tacos, and we just had the value side, I don't think we'd be doing that great," Novak said. "You have to have both. This consumer environment is still very, very tough."


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China

Novak added that the two biggest risks in the food industry today are food safety and social media. The latter provides a real-time, consumer feedback platform that can blow any issue out of proportion.

Yum! perhaps learned this the hard way when KFC came into focus after an investigation in China uncovered some chicken suppliers were using excessive amounts of antibiotics to expedite the growth cycle.

The company's sales took a huge hit (KFC was down 41 percent in January) and are just now showing some signs of recovery.

"We learned some tough lessons from China. We've always been very proud of our supply chain, but we've enhanced the process and launched 'Operation Thunder' to do everything we can to ensure rigid quality standards for our supply," Novak said.

The company is communicating its effort through marketing materials, including TV commercials that end with a voiceover saying: "Operation Thunder selects quality chicken for you." Novak predicts it will be about six months until the company shows signs of solid recovery.

In the meantime, Yum! continues to expand the KFC brand in lower tier cities throughout China, and forecasts getting up to at least 20,000 restaurants in the longterm.

"Just like McDonald's has 14,000 restaurants in the U.S. and you go to any small town and you'll see a McDonald's — they're literally everywhere — that's exactly what we're doing with KFC in China. We have firsthand advantage and prime locations," Novak said.

KFC is also growing its home delivery and 24-hour operations, while building its breakfast business. Also this year, the brand will feature a celebrity tie-in with Houston Rockets NBA player Jeremy Lin.

International

China certainly isn't the only gem in Yum's portfolio. KFC will soon pass McDonald's in unit size in India, according to Novak. There, the brand is known for strong core chicken and vegetarian products, as well as a "Wow" value menu. It is also testing breakfast.

In Europe, France provides Yum! Brand's highest AUVs in the world, and the company is introducing television advertising in Germany for the first time this year. It is also beginning to expand in Spain.

"McDonald's makes well over $1 billion in these countries and we make less than $100 million. If we can get to one-third of the size of McDonald's, we'll have a tremendous upside and we think we can do that," Novak said.

Read more about operations management.

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