* Investors eye China ops as Yum reports Q4 earnings on Mon
* Yum aims to open 600 stores in China in 2012
* China to account for 50 pct of global revs in 2012-Credit
By Terril Yue Jones
BEIJING, Feb 3 Four floors up overlooking
the bustle of the cavernous Joy City Mall in Beijing, diners
take a break from shopping to slurp noodles and nibble on
dumplings at an Ajisen restaurant.
It's an increasingly common sight: Chinese consumers turning
to local fast-food alternatives to the long-dominant pair in
China -- Yum Brands Inc's KFC and McDonalds Corp
Twenty-five years after Yum introduced China to
American-style fast food with its first fried chicken store, the
two U.S. giants are facing a plethora of Chinese and Asian
eatery chains that are steadily munching away at their market
As Yum prepares to announce fourth-quarter earnings on
Monday, some investors are eyeing its China operations warily.
Last week saw a flurry of put options on Yum after McDonalds
reported earnings and said foreign exchange fluctuations and
other factors could eat into profits in 2012. [ID: nL2E8CPDU5]
But Yum's China business seems robust. The company said on
Dec. 5 that it expects a benefit of $40 million this year from
yuan-dollar exchange rates, while operating profit in China is
expected to grow 15 percent. It plans to open 600 more locations
in China in 2012 at a pace of more than one every day.
China accounted for 36 percent of Yum's global revenue in
2010 and is estimated to be 44 percent in 2011 and 50 percent in
2012, according to Credit Suisse.
Yum's biggest challenge comes from a rising torrent of
competition as Chinese consumers increasingly have more money to
spend and more places to spend it, which could mean slowing
growth rates for Yum in the future.
At the Ajisen outlet, stacked above a Starbucks coffee shop
and a Burger King restaurant, shoppers headed in and out all
"We were just browsing, and stopped here by chance to eat,"
said Sun Haihao, 30, an engineer from Sichuan province who was
He's been to Ajisen, a Japanese-style restaurant run by
Ajisen (China) holdings Ltd and KFC in Mianyang city
where he lives. "KFC can be too oily," Sun said. "Ajisen is
Asian, so we're used to it."
GROWTH OUTPACES CHINA'S GDP
A recent Reuters poll showed that economists expect China's
GDP to grow 8.4 percent this year, down from 9.2 percent in
2011. Meanwhile the quick-service restaurant industry is
expected to grow around 15 percent, meaning further revenue
growth for Yum and McDonalds, even as their market share
declines, according to market research firm Mintel.
"KFC and McDonalds are growing outlet numbers, but so are
domestic and foreign chains plus independents," says Paul
French, Mintel's chief China analyst. "The pie is bigger, but
the number of players wanting and getting a slice of it are
bigger too. A rising tide does not necessarily raise all boats."
Ajisen is among the legion of upstarts, which include fellow
Japanese entrant Yoshinoya ; Taiwan-owned Dico's
restaurants and 85 Degrees Bakery; Burger King, Dairy
Queen and Papa John's Pizza from the United States;
South Korean-owned Paris Baguette and Tous Les Jours bakeries;
and a host of Chinese chains such as Golden Jaguar, Yonghe King
and Country Style Cooking.
Many are growing fast, albeit from a smaller base. Ajisen
(China) reported a boost in first-half restaurant income last
August of 40.8 percent to HK$1.6 billion ($206 million).
Country Style Cooking, a family-style chain offering casual
cuisine and focused on western China, increased its locations by
63 percent in 2011, according to China Market Research.
Meanwhile, the number of all of Yum brand restaurants in China
last year grew 13 percent.
Louisville, Kentucky-based Yum, whose restaurants in China
also include Pizza Hut, East Dawning and a stake in Little
Sheep, plus Taco Bell and others in the United States, has had
remarkable success in China.
It was the first foreign fast-food restaurant chain to set
up business here, opening a fried chicken outlet in Beijing in
1987. Today it is by far the largest with nearly 3,500 KFC
locations across China, and more than 4,200 restaurants in all,
well ahead of McDonalds' 1,400 locations.
"KFC restaurants are more profitable than any of its
competitors and generate about four times as much revenue per
restaurant as its U.S. locations," says James Roy, senior
analyst at China Market Research, a Shanghai-based consultancy.
"No other competitor can come close to adding the number of
restaurants per year it can," Roy said.
Yum itself said at the end of the third quarter, "We
consider China to be the greatest restaurant opportunity of the
Yum executives were not available to comment further because
of the regulatory quiet period before the earnings announcement.
Yum's 2011 China revenue to be announced on Monday is
expected to rise 23.3 percent, a slower pace from 32.6 percent a
year before, according to Credit Suisse.
But China is Yum's growth engine. The company's chief
executive, David Novak, said in December that he expects China
to lead global profit gains, projected to be up 13 percent for
2011 "despite our disappointing U.S. results" and up 10 percent
for 2012, excepting special items.
Rising affluence of the Chinese consumer is behind China's
flourishing casual dining market, according to Yuval Atsmon, a
Shanghai-based consultant with McKinsey & Co.
"Look at the population of the upper middle class with an
income of more than 100,000 RMB ($15,800) a year. It's now 15-20
million households, but it will be over 75 million households in
five years," Atsmon says.