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Yum China’s Woe Coming a Long Way and No Need to Panic

In the past several days, Yum Brands market value drops drastically. Its woes have come a long way, and has little to do with food scandal and so on. However, there is also no need to panic.

I have written many articles in the past several years detailed about Yum business model in China. 

First, the enormous success of Yum in China is largely due to the “peculiarity” of China’s market (driven by investment and export) in the past 30 years. As the first fast food brand into China, Yum’s brands have fully taken the advantages of their strengths as a well-managed international brand. However, market is still the market. No country can be exception. When China’s market eventually returns to its common sense, the boom of Yum’s two brands also ends.

Second, KFC as the major driving force of Yum Brands has long lost its direction as a business model. In fact, it defies all fast food common sense, adding a long line of food choices, from fried chicken, hamburgers, Chinese breakfast menu to even rice dishes. Its brand as fried chicken has long been diluted to something which is already hard to define.

Third, the KFC business model shew the cracks even as early as 2007. Thanks to Chinese government ginormous trillion dollars of market spur in 2008, KFC ‘model’ was revived and expanded exponentially due to its strong management and easy access to capital investment. Between 2008-2012, it was a huge party for international companies. McDonald and Starbucks all benefit because of this.

Right now, the party is ended. Despite of the woes of Yum, there is no need to panic.

First, China’s regulations are one of the highest and strictest in the world. It has established such high entry barriers that majority of domestic restaurants are unable to climb on, which require high investment, strong management and logistical channels. Unintentionally, China’s regulations have built an oasis for the international companies. As long as these regulations stay, the competition to Yum’s major market is unlikely to be taken despite of the highly nimble and creative domestic competitors.

Second, despite of KFC’s own confusing brand positioning, it’s ubiquity and domination does have an impact on the market perception as a good model to follow. Market positioning is murky to vast majority of China’s restaurants, domestic or international.

Third, the majority of YUM’s stores are company-owned, and both KFC and Pizza Hut are the most recognizable brands in China. It makes sense in the foreseeable future that Yum will start to franchise their stores, which can instantly bring in the cash fall.

Fourth, to franchise can also save huge amount of money for YUM in labor costs and so on, becoming more as a management company on par with its American counterparts especially when China’s labour costs grow so fast. After all, Yum's main profit margin was derived from the low labor costs.  When that factor fades, the incentive for company-owned stores is also diminishing. 

All in all, Yum is unintentionally protected by China’s regulations, its management depth and financial resource can sustain its brands in the darker days in China, and it has many ways to create more profits. If its bureaucratic structure has capability to take advantages of China in the transition and start to refine its business model and brands, it will only grow stronger.

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