Here's Yum! Brands' Strategy to Go Upscale and Revive Sales in China

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Apr 14, 2015

Yum! Brands (YUM, Financial) has been looking to revive sales in the Chinese market for a very long time. The American fast food giant had announced plans to refurbish its KFC outlets in the country around a year ago. Recently, Reuters reported that the company is working on expanding in the field of upscale dining in an effort to recover in its most lucrative market. Yum! is known for operating fast food outlets such KFC and Taco Bell, but presently the company is experimenting with a small eatery Atto Primo. The quick service restaurant chain considers Atto Primo as a “lab” to research and make an entry in China’s upscale dining market.

With the launch of the Italian eatery, Yum! is aiming to boost its top and bottom lines from its most profitable market. Atto Primo is located in Shanghai which is known for some of the most expensive restaurants. Yum! is testing the idea to gauge the appetite of the Chinese population for such eatery under its brands, and see if the concept could be expanded in case it gains popularity.

Stepping into a new venture
Atto Primo is a trendy dimly lit eatery with colonial style balconies. A Yum! spokesperson Jonathan Blum said that the eatery is “an innovation lab to help us learn more about the evolving tastes of Chinese consumers.” He further said that the company plans to test recipes that it could offer in its China outlets. A Shanghai-based analyst Michael Griffiths working at research firm TNS believes that this new development suggests that the company is trying out something different.

It’s an endeavor that Yum! is making to bounce back from the long sales depression it’s been into since 2012 when it got entangled in the chicken scandal. The company made quite a few efforts to regain confidence of its Chinese customers after its image got marred owing to the usage of chicken with inappropriate antibiotic levels. Recovery has been very slow. When numbers started improving, the company experienced another setback in the form of another food safety scandal last year. McDonald’s (MCD, Financial) also got hit by the food scare in China, but it isn’t as affected as Yum! owing to its smaller penetration in the market. Also, the Big Mac maker’s efforts to upgrade stores and offer McCafe has somewhat assisted in offsetting the damage.

China turnaround is critical
In the last quarter of 2014, Yum’s same store sales in China declined 16%, which is primarily a result of the food scare in the country. Meanwhile, local competition has also increased. China is Yum’s largest operating market from where the company derives majority of its revenue and profit. It operates close to 7,000 outlets in the country. Thus, it is extremely crucial for the company to accelerate its performance in the mainland. This has been pointed out by the company’s newly appointed CEO Greg Creed when he recently said that boosting sales in China is “priority number one, two, and three” for Yum!.

Besides entering into the high-end dining space, Yum’s taking other brand strategies to drive overall growth in China. The company intends to open 700 new fast food outlets in 2015. Creed said that the company is aiming to take on arch rivals including Starbucks (SBUX, Financial) by expanding its coffee offering in China.

Yum’s image has been adversely affected by the scandals that have raised doubts on the reliability of its supply chain. However, Yum’s strategies to rebuild its brand and efforts to experiment with high-end dining will help the company test the preferences of Chinese customers and go upmarket. It might take some time, but these steps should fetch results for the company.