* Restaurant rents, labor costs surge in the biggest Chinese
* 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
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
Yum also is speeding up openings of Pizza Hut restaurants
because they have better margins and less competition, Chen
"It won't be too long before we reach 1,000" Pizza Hut
restaurants in China, said Angela Loh, Yum China's chief concept
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
"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.