Yum! Brands: Scaling Pizza Hut in China

Don, can you share a short introduction on your background in the restaurant business?

I won't go back as far as my high school days, when I first had a fast-food job at a brand called Roy Rogers in Philadelphia, but my significant experience came in 1998 at Tricon Brands, which was spun off out of PepsiCo in 1997. I joined KFC US in 1998, in the Louisville, KY headquarters for Tricon. Right now, it’s Yum! Brands. I was working on the finance team, doing capital planning, brand planning. I was working with the operations team. Then I had an assignment overseas in China, which lasted about 11 years longer than my initial six-month assignment. It lasted from 2004 to 2015, at which point I came back to the US, worked at headquarters on the CFO staff, heading up financial plan analysis for Yum! Corporate, and then I left the company around the time of the spinoff. China spun off Yum! – it’s China YUMC now on the big board – in 2016, and I figured that was a good time for me to look for something different. That’s a bit of my background, about 18 years at Yum! Brands.

When you first landed in China, how did the Chinese market look?

That was 2003 or 2004. Back then, China was newly introduced into the WTO, and you could see quite a bit of investment going on, yet there were still a lot of underdeveloped cities. Shanghai was where I was based, so that was definitely the “Gold Coast” there, Beijing, Wanzhou, and tier-one cities; those were getting a head start, Shenzhen, and Shanghai. But if you went inland more, it was certainly an up and coming area. There was a lot of infrastructure being built. As far as consumers were concerned, middle-class wealth wasn't quite there. Those that could would access the western brands that were so new to China, KFC being one, obviously, and Pizza Hut, which was more of a casual dining experience.

As far as doing restaurant business back then in China, you had to do it yourself. We owned our own logistics. We sourced suppliers ourselves. We didn't outsource it like, say McDonald's might have done. We did a lot of our stuff internally because we couldn’t go to a third party and say, hey, can you go find us distribution centers and franchisees. We helped build up the restaurant business in China, developing talent and teaching how to run a restaurant from the ground up, one store at a time. It was really an interesting time.

How did the Chinese consumer view pizza as a concept?

That’s a great question. Pizza came into the country as sort of a foreign food, as you would expect, Italian. Speaking probably for not just China but for Asia, milk-based products and cheese were not a big thing, and obviously, cheese is a big part of any good pizza. So there was a bit of a getting used to thing for folks to eat a pizza. One thing that did resonate with consumers was that pizza is a sharing kind of product.

If you ever go to a real Chinese restaurant, not something you might find in the US or a Chinatown in a western city, but in China, you often find Chinese restaurants where everyone’s sharing at a round table with a lazy Susan. From an occasion standpoint, pizza had a good resonance with the Chinese consumers, who love to gather around and eat things. Pizza, from the beginning, was not just about pizza. It was a broad business. This was a critical insight that the leaders of the brand developed before I got there, and that’s what help bring it to become a leading brand in China.

You mean adding more traditional Chinese dishes plus the pizza to Pizza Hut’s offering?

Not actually Chinese; in fact, it was more of a broad menu of western casual dining. It was a western casual dining brand, unlike in the US, where you have Pizza Hut, Domino’s, Papa John’s, pretty much a functional pizza house delivery. It used to be the red roof Pizza Huts. There in China, from the really early days, they had escargot for appetizers, they had cappuccino, salads, desserts. When I arrived, there was a full casual dining table service. It was like casual dining. You got table service that came out professionally handled.

It was different because you got your own order. For many Chinese, it was like, "You mean, I have my own dish?" For a lot of folks, you had group sharing; you didn't get your own dish in typical Chinese restaurants. So it was a fascinating place. I can get into more behind how the broad menu came about, but from the very early days, Pizza Hut went way beyond just pizza. It was a broad, full casual dining experience. The anchor was pizza, but you don't just go there to have a pizza. You go there for a dining experience, be it lunch or dinner.

What's the penetration of pizza and revenue for a typical unit? Is it a small percentage, or do they typically choose other options, other concepts?

If I had to crunch the pizza menu item mix, it was always around 30% to 35%. It was not a dominant thing. It was certainly very common to have that, but folks would come there and order something beyond pizza. When I was there back in 2010 or so, we introduced sizzling steaks on an iron skillet with the sound and smell, and the whole experience. They were marketing steaks at the time, pasta, and a lot of things. Pizza is still number one on the leader board, but it's not 90% of the food sold. It's certainly central and core to the brand, but it's not as dominant as you would find in other markets.

The brand equity of Pizza Hut is effectively a leading restaurant brand.

It’s the leading western casual dining restaurant in China, and in the early days, it really got its credibility by introducing Chinese consumers to the world. Today that's different. There are a lot of Chinese travelers. They've got wealth, a middle class. Of course, I’m talking about before today's current environment with the pandemic; there has been a lot of travel. But back in 2005, they didn't even have much internet access for getting exposure to western food, not just visually seeing it but to taste it and to smell it, and so forth. Back then, when I joined Pizza Hut, they would introduce festivals.

Every year in the summer, they’ll have a Greek festival one year, they’ll have a Brazilian festival another year. For six weeks in the summer, when the kids were off school, and it was leisure time, we'd have products that were not literally imported, but the experience and the product was delivered. Back then, there wasn't really anywhere else you could get that, even in Shanghai or other cities. It was the place to go to have Greek or have Portuguese. The Chinese didn’t travel as much. It was much harder to travel. They couldn’t afford it. But if you wanted to do that, you could just walk down to that mall or that area, that trade zone, and get that experience.

They even had people dressed up as Spanish-looking people or Greek. It was almost like an Epcot Center at Disneyworld, where you really feel like you're in a country. Not perfectly, but you can get the food and taste the food. It was pretty authentic. We made sure we got the food right from what does Greek fish taste like, what does Spanish paella taste like. It was festivals; it wasn't all year long. That's one of the ways Pizza Hut brought western casual dining and very little Chinese food to the menu.

Chinese food came about more with delivery at Pizza Hut because that’s more functional. If somebody at home said, let's go order some carry out delivery, somebody else might say, well, I want Chinese food, and if that somebody is important, you’re not going to go to that place as an offering for any Chinese food. So you have to put it in there to address that veto power, if you will, for those that insist on having Chinese food. But from a Pizza Hut casual dining standpoint, the main western casual dining brand, they call it in Chinese Bìshèng Kè, it still is a leading brand in China. There is a lot more competition, but it’s still a leader.

How has the brand equity of Pizza Hut or the brand image changed as the Chinese have started to travel, and other brands have entered China?

Yes, it transformed rapidly. Right when I got back to Louisville, we were doing some forecasting, and things were changing. In the 2000s through mid-2015, like the middle of 2010 to where we are today, it was still a very dominant brand, and there was more competition climbing up, but there wasn't yet the advent of the aggregators. In the western world, you might have the Yelps, or the Grubhubs, or the one that just bought Grubhub. In China, there's Ele.me and Dianping and so forth, and the mobile phone. One of the big step changes for the consumer was discovery, and by pulling out your phone and sorting through the list and who’s got a deal today, you could find five choices within three miles.