As part of ongoing China rebound, KFC plans revamp in Q2

Yum! Brands' biggest obstacle in recent memory — the chicken supply chain and subsequent avian flu outbreak in China in late 2012 which led to a 41 percent drop in same-store sales in January '13 — had lingering effects throughout last year because it directly affected the company's flagship business in KFC China. But Yum!'s rebounding efforts are taking hold, executives said during today's earnings call, and all signs are pointing to a "strong bounce back" this year.

"2014 needs to be a show me, don't tell me year," CEO David Novak said during the call. "2013 was frankly a very humbling year. However, we used it as an opportunity. I'd go so far to say we did some of our best work in 2013."

For example, in response to the supply chain issue, KFC China launched a marketing campaign, "Operation Thunder," aimed at strengthening consumer perception about food safety. The company also launched a quality assurance campaign called "I Commit." Novak said since these initiatives rolled out, key brand attribute scores are nearly back to where they were before the crisis.

In addition to those marketing efforts, KFC also tightened labor scheduling and optimized "service levels with fewer labor hours." In Q2, the company plans to "restate the KFC brand," with major initiatives across every aspect of the business — from new products to menu management and marketing efforts, to new consumer touch points and digital technologies.

"Overall, our goal is to build off the momentum that we had coming out of last year taken into this year and continually get stronger in building consumer news and excitement for the brand," Novak said. "The goal is to bring new energy and dramatic news to the KFC brand."

U.S. Business

Domestically, CFO Pat Grismer said the company has largely completed its U.S. refranchising program; 10 years ago, about 25 percent of units were company owned, while 75 percent were franchised. Now, about 90 percent of U.S. locations are franchised.

"This has not only improved our return on investment capital but should also help deliver more consistent performance going forward given inherently lower profit volatility with the franchise business," Grismer said.

Taco Bell continues to be the bright spot in Yum!'s U.S. portfolio, generating two-thirds of domestic profits. In Q4, Taco Bell turned in its eighth consecutive quarter of same-store sales growth, up 1 percent, overlapping 5 percent last year.

The company hopes to continue that momentum this year with the national launch of breakfast and mobile ordering.

"Our breakfast offering includes three terrific destination breakfast products at incredible price points and we're now in the midst of training our teams for a national launch in the first half of the year," Novak said.

Taco Bell opened 86 net new units in 2013 and is on pace of growing from 5,800 units today to at least 8,000 units in the U.S.

Grismer said Taco Bell's solid performance offset disappointing results from both Pizza Hut and KFC.

Digital initiatives

Taco Bell's impending mobile ordering rollout underscores one of Yum!'s top strategic priorities — digital technology. Novak said in China, 70 percent of delivery orders come from online platforms.

In international markets, mobile ordering tests are underway at KFCs in France, the United Kingdom and Australia. And, in the U.S., online ordering at Pizza Hut accounts for about 40 percent of orders and more than $1 billion in total annual volume.

"Make no mistake, technology is among the highest priorities that we have in our company and all of our businesses are focused on ways that they can harness the power of digital technology to further differentiate our experiences for our customers," Novak said.

Emerging markets

Finally, Yum! Restaurants International turned in solid results — same-store sales growth of 2 percent in the quarter, including 3 percent growth in emerging markets such as Russia, Southeast Asia, Africa and Latin America. In 2013, YRI entered four new emerging markets — Tanzania, Ukraine, Argentina and Mongolia. The company said emerging market economies are expected to grow at almost three times the rate of developed market economies for the foreseeable future.

"We recognize that emerging markets will have their ups and downs. They are still going to be growing their GDP and we're on the 5 percent rate in the foreseeable future almost three times more than the developed countries. What we're focused on doing in emerging markets is providing affordable everyday value making our brands more accessible, more affordable to the emerging classes as the incomes rise. The big story that we have for emerging markets is just development opportunity," Novak said.

He adds that Yum! currently has about four restaurants per million people in China, compared to 60 in the U.S. Other investment markets include Turkey and Africa.

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