Yum eyes young India to help mirror China profits

LOS ANGELES/MUMBAI Wed Feb 29, 2012 4:13am IST

A sign shows Yum Brands Inc's support center at its corporate headquarters in Louisville, Kentucky January 18, 2011. REUTERS/John Sommers II/Files

A sign shows Yum Brands Inc's support center at its corporate headquarters in Louisville, Kentucky January 18, 2011.

Credit: Reuters/John Sommers II/Files

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LOS ANGELES/MUMBAI (Reuters) - Rati Motwani of Mumbai treats her 7-year-old daughter to a fast-food fix almost every weekend.

Motwani, who lives in a nation where most people still eat home-cooked meals and where lentils and rice are staples, says Western chains increasingly are gaining a following and changing old dining habits.

"In Indian cities today, pizza and burgers have become staples and have replaced the traditional daal and chawal (lentils and rice), which we grew up eating. This is their fun food, this is what they enjoy," said Motwani, 33.

KFC and Pizza Hut parent Yum Brands Inc (YUM.N) is hoping this Western fast-food phenomenon reaches millions more Indians as it tries to mirror the success story of China, which now contributes half of its operating profit.

Yum is targeting Indian students and young office workers with adaptations of popular Western fast-food products designed to appeal to their unique tastes -- and the nation's many vegetarians: Tandoori paneer pizza or vegetable "Zinger" burgers anyone?

By 2020 Yum expects to have 2,000 restaurants in India, up from 374 now.

"I look at India as the most dynamic market for us in the 21st century," Yum Chief Financial Officer Richard Carucci told Reuters in a recent interview.

But few experts expect Yum's ride in India to be as smooth as in China, where the company has 4,500 restaurants after virtually uninterrupted growth from the day KFC brought Colonel Sanders' secret fried chicken recipe to a restaurant on the edge of Beijing's Tiananmen Square in 1987.

Still, they do say that India's young and upwardly mobile population promises to deliver enough growth by 2020 to offset an expected moderation in China.

INDIA VS. CHINA

In a sign of how confident the Louisville, Kentucky-based company feels about its prospects with diners like Motwani, Yum this year has separated its India operations from its larger international unit and is reporting results as a standalone division. The only other countries that get such treatment are China and the United States.

India is expected to overtake China as the world's most populous nation as early as 2025, according to projections from the United Nations.

While China's population is aging, 60 percent of India's 1.2 billion residents are under the age of 30, and that is the sweet spot for fast-food restaurants.

People in India currently spend less on fast food -- 2010 spending per person was $11 in India versus $60 in China -- but India's GDP growth is expected to exceed China's as early as 2014, Bernstein Research analyst Sara Senatore said, citing an analysis of data from Euromonitor International and other sources.

"At some point India's growth is going to be so rapid that it will be a pretty big driver of Yum's business," she said.

For graphic on India vs. China GDP growth and fast-food: click link.reuters.com/few76s

Nevertheless, even as Yum, McDonald's Corp (MCD.N) and other chains race to build a leadership position in India, experts say low wages, rickety infrastructure and government bureaucracy are hurdles to growth.

"It will take at least a few decades for India's economy to catch up" with China's, said Warren Liu, author of "KFC in China: Secret Recipe for Success".

"I do not think KFC's scale of operation in India will come close to China in the foreseeable future, if ever," added Liu, also a former China vice president at Tricon Global Restaurants, which was spun out of PepsiCo (PEP.N) in 1997 and renamed Yum in 2002.

Yum's dollar and restaurant investments for the first decade of operations in India and China have been comparable, but India has taken longer to turn a profit.

In India the company now has 215 Pizza Huts, along with 156 KFCs and 3 Taco Bells. It is forecasting 2,000 units and a total investment of $1 billion by 2020, an investment schedule similar to China in the early days.

"In China, at the same stage of development, we may have been making $20 million versus breaking even in India today," Carucci said.

The bigger proportion of KFCs in China helped that unit reach profitability faster than India, he said, adding that the fried chicken chain has more "stretch" than Yum's other brands because of its low price points and higher unit sales.

Yum plans to make KFC the No. 1 brand in India, as it is in China, and is modeling 13 percent earnings per share growth for 2020 -- with India's 2,000 restaurants contributing 2 percent and China 9,000 units kicking in 5 percent.

"It's natural to think that 10 years from now China's not going to be growing quite as fast. Fortunately, that's when India starts to kick in," said Tucker Brown, research principal at Sustainable Growth Advisors, which holds shares of Yum.

SECOND CRACK AT INDIA

Penetrating the market in China was an easier bureaucratic task for Yum.

Under China's growth-seeking, one-party system, Yum turned its first-mover advantage into a dominant position. India's red tape-mired and freewheeling democracy took a while to warm to foreign operators, resulting in a still fragmented market.

Twenty-five years after entering China, Yum still has far more restaurants than other Western restaurant operator.

At the end of 2011, the China operation had almost 4,500 restaurants and generated half of Yum's overall operating profit -- $908 million. Rival McDonald's plans to have 2,000 restaurants in China by the end 2013. Its China results are reported as part of McDonald's Asia-Pacific, Middle East and Africa unit, which accounts for just over one-fifth of McDonald's overall sales.

KFC also beat most major fast-food rivals to India in 1995, but its early days were marred by sometimes violent protests by farmers and ultranationalists opposed to the arrival of foreign firms to India's newly opened economy.

The company closed most of its KFC India units and focused on Pizza Hut, which debuted in 1996, until it rebooted the KFC business in 2001.

Meanwhile, companies like Domino's Pizza (DPZ.N) and Baskin-Robbins (DNKN.O) were sprinting past Yum. They each boast more outlets than Yum in India, where McDonald's also is expanding aggressively and Starbucks Corp (SBUX.O) and Dunkin' Donuts will soon debut.

Yum's eating-out culture and infrastructure also are playing catch-up with China.

"Indians prefer eating at home and though it is changing, it still is largely that way," said Pinakiranjan Mishra, partner and national leader for consumer products and retail at Ernst & Young in Mumbai.

He added that Indians are "extremely value conscious".

Indian incomes remain very low by global standards and lunch from a street stall can cost less than 25 rupees, or 50 cents.

Yum and McDonald's are responding with value menu items, like veggie burgers, that sell for as little as 25 rupees.

Also, India's infrastructure is a major headache and the country lacks China's commitment to building roads and other transport systems needed to get fresh and frozen food to restaurants.

"It's still behind China, it's even behind where China was 10 years ago, but it's much better than it was," Yum's Carucci said.

(Reporting By Lisa Baertlein in Los Angeles and Nandita Bose in Mumbai)

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