Yum Brands is undergoing a strategic shift in China, signaling towards changing market trends and slowing revenue. The brand under which KFC, Pizza Hut and Taco Bell operate decided to spin off its China business into a separate entity last year. As part of the realignment, CEO China of Yum Brands Inc Muktesh Pant sold 91,228 shares of Yum on the 22nd of July, for US$8.2 million.
The Indian born CEO, of Yum China led the China entity to be the company’s highest profit earner. At the end of February 2016, Yum had over 5,000 KFC restaurants in China, accounting for a quarter of KFC restaurants worldwide. It also held more than 1600 Pizza Huts, in more than 400 cities and had acquired Little Sheep hot pot due to burgeoging demand in the Fast food space.
However, as tastes changed – being healthy came back into vogue and the the brands faced backlash due to their involvement in International uprisings, the Yum brand faced sever criticism in local media resulting in a fall in revenue. Although China remains the company’s primary source of profit the company’s revenues fell from US$ 6.898 billion in 2012 to US$ 6.909 billion in 2015. The latest performance report shows that in the first half of 2016, Yum clocked revenues of US$ 5.627 billion, down 1.75 percent.
The company was expected to sell its China entity to either China-based private equity fund Primavera or Singapore’s sovereign wealth fund Temasek. However as of yet, neither have been able to match the price Yum brands is demanding.
As Beijing carefully controls what her population eats (see China has more obese people than America) the detachment of Yum China from her Global counterpart is not only expected but also a precursor for many large multinationals to flourish in China. If a MNC needs to operate profitably in China, it needs to do so with Chinese characteristics. Therefore spinning off the China entity allows Yum to flourish in China albeit on Beijing’s terms without harming the rest of the company.
As China asserts herself globally, and strengthens her domestic market for local companies, it will become vital for companies to operate more according to local laws than international practices as has been the case. While Chinese companies and brands will always be given preference, foreign companies will need to prove they can survive in the Chinese market space before they are given their due by Beijing.
This means the table are turning, it will no longer be easy to enter China, like Uber, foreign companies might just get bought out by local players in China if they are unable to spend substantially, follow local laws, culture and habits.