RETAIL: KFC Owner Sows Upscale Seeds In Search Of China Rebirth

By newsdoug on April 17, 2015

Bottom line: Yum’s new upscale Italian restaurant looks like a smart concept for the China market, but a broader campaign to move its Chinese KFC stores upmarket looks like too little too late.

A year after announcing plans for a major overhaul of its aging Chinese KFC stores, Yum Brands (NYSE: YUM) is adding another prong to its China reboot with the launch of an upscale Italian eatery as it tries to to regain relevance in its most profitable market. Yum’s newest China restaurant brand, Atto Primo, is situated in the heart of the Shanghai Bund, home to some of the city’s oldest and most famous buildings and most expensive restaurants. Yum is calling the restaurant a “lab” for now, but I suspect it could quickly expand the concept with new outlets if it proves popular.

Online sources indicate that Atto Primo is still in its testing phases, and descriptions and photos depict and restaurant that’s decidedly upscale with high but not meteoric prices starting at 300 yuan ($50) per person. The photos show a place with lots of wood and tile decor. The atmosphere looks comfortable but also a bit confused on whether this is a place for adults or families, which could lead to some branding problems if people come expecting one or the other but not both.

The Yum name and its stable of mid- to low-end brands, including KFC, Pizza Hut and a few local chains, is nowhere in the new restaurant or its literature, which isn’t too surprising due to the huge difference in target audiences. Yum’s only mention of the chain at all comes in a US regulatory filing, according to one report on the new roll-out. (English article)

This particular roll-out is part of Yum’s broader effort to reinvigorate its tired stable of brands, that have become somewhat passe in China and have also been tainted by several food safety scandals. A big part of the reboot involves a bid to move upscale, reflecting the very real fact that average Chinese consumers now have far more income than when Yum first entered the market with its landmark KFC store at Tiananmen Square in 1987.

Yum detailed its KFC relaunch plan about a year ago, which included a broader “dining room” concept aimed at making the new restaurants feel more like a home rather than a place to eat quickly and go. (previous post) It made the announcement as its KFC same-store sales were declining after years of breakneck growth, as Chinese consumers abandoned the chain. Last month new Yum CEO Greg Creed said that turning around Yum’s flagging China performance was his first, second and third top priorities.

I seldom go to KFC anymore, and am probably indicative of what’s happening among the broader Chinese population. I personally find the food quite greasy, and the atmosphere noisy and not conducive to enjoying a pleasant meal. Nothing about the stores and their food has really changed that much these last 20 years, which perhaps is part of the problem. The bigger challenge confronting Yum right now is the rise of many other eating options with better food and atmosphere at comparable prices.

In an effort to see how the refresh campaign is going, I visited 3 KFCs near the university where I teach to see if anything was different. All 3 had new premium coffee counters, as part of a move announced early this year to pursue the kinds of yuppies who frequent Starbucks (Nasdaq: SBUX) and McDonald’s (NYSE: MCD) in-store McCafes. (previous post) Other than that, all 3 stores had brighter signage emphasizing fresh and healthy ingredients. Only one had wi-fi, and only one had a newer seating format that emphasized more space and comfort from the older, more cramped and basic seating layouts.

These steps certainly seem like positive moves to win back customers, though they may be too little too late, especially in the premium coffee segment that has recently become quite crowded. I do like the Atto Primo concept a bit more, as it really does cater to a growing demand from many Chinese for a more pleasant and upscale eating experience. I imagine Yum will tinker with the brand for a year or so before deciding whether to expand it to elsewhere in China.

At the end of the day, it’s encouraging to see that Yum is finally taking some very concrete actions to try and reverse its slide in China, its largest market for both revenue and profits. But that said, I’m still not convinced the changes at KFC will be enough to win back consumers who see the brand as tired and past its prime. Same-store sales at Yum’s 7,000 China restaurants sagged 16 percent in the last quarter, partly due to a food safety scandal that broke in the middle of last year. It’s still trying to recover from that setback, and could face a difficult time getting back into positive growth territory for the first half of this year.