* Restaurant rents, labor costs surge in the biggest Chinese cities
* Profits, "consumer enthusiasm" better in smaller cities
* Yum shares rise after plans revealed, they slid last week
By Lisa Baertlein
NEW YORK, Dec 6 KFC and Pizza Hut parent Yum Brands Inc on Thursday said it is rethinking where it opens new restaurants in China and accelerating openings of its high-margin pizza chain in that country, where business has slowed and competition has grown.
China remains the world's fastest-growing major economy even though growth has cooled. Restaurants and retailers are flocking to its top cities, contributing to a spike in rents and labor costs that have bitten Yum's restaurant profits.
"We will be more selective in our pace of expansion in these areas," Yum China Chief Financial Officer Weiwei Chen said at the company's investor meeting in New York City.
Yum shares rose 1.9 percent to $67.14 in afternoon trading as investors digested its new China plans. Last week, its shares tumbled from an all-time high of $74.74 hit just before Yum warned that it expected same-restaurant sales in China to fall 4 percent in the fourth quarter.
Yum has more than 5,100 restaurants in China, which contributes more than half of its overall revenue and operating profits. It already has announced plans to open 700 new units in China next year.
Chen said Yum's restaurants in China's smaller cities have better returns due to lower costs and "consumer enthusiasm for our brands" - so the company is focusing building efforts in those areas.
China's smaller cities will become bigger cities due to the government's urbanization efforts and Yum "will already be in position to take advantage of the larger and more affluent population," Investment Technology Group analyst Steve West said.
Yum also is speeding up openings of Pizza Hut restaurants because they have better margins and less competition, Chen said.
"It won't be too long before we reach 1,000" Pizza Hut restaurants in China, said Angela Loh, Yum China's chief concept officer.
Yum has two Pizza Hut concepts in China. One is a full-service restaurant and the other offers pizza delivery.
KFC accounts for the lion's share of Yum's restaurants in China, where the company was a pioneer and remains the largest Western restaurant operator.
But the company is no longer a lone wolf in China, where foreign brands have flocked and local upstarts are getting a foothold.
"We do face more severe competition," Loh said.
Yum's rivals in China include U.S. companies such as McDonald's Corp, Subway, Papa John's International Inc and Starbucks Corp.
Asian chains also turning up the heat. Those include Taiwan-owned Dico's, a fried chicken chain that takes direct aim at KFC; Ajisen (China) Holdings Ltd, a Japanese-style noodle chain; and a host of Chinese chains such as Golden Jaguar, Yonghe King and Country Style Cooking.
SLOW START TO 2013
Yum forecast mid-single-digit percentage same-restaurant sales growth in China for 2013. Chief Executive David Novak told investors he was "very confident" that the company would turn in "very solid" sales growth next year at established restaurants in China, its top market.
Yum is no stranger to volatility in China. While it has chalked up many years of robust growth there, it posted declines in full-year same-restaurant sales - an important performance measure for restaurant companies - in 2005 and 2009.
Novak said some of the fourth-quarter's underperformance could be attributed to cooling economic activity in China.
Novak, who is also Yum Brands' chairman, said he expects next year's same-restaurant sales in China to be stronger in the second half, after a softer first half.
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