Yum China’s CEO on Chinese consumers’ incredible hunger for foreign brands

Co-host Michal Lev-Ram was off for this week.

Listen to the episode or read the full transcript below.

Transcript

Alan Murray:Leadership Next is powered by the folks at Deloitte who, like me, are exploring the changing rules of business leadership and how CEOs are navigating this change.

Welcome to Leadership Next, the podcast about the changing rules of business leadership. I’m Alan Murray, and I’m doing this episode alone. Michal Lev-Ram couldn’t be with me. But I’m in Abu Dhabi, where we’ve convened business leaders from 30 countries around the world for conversations on the top topics affecting businesses, the Fortune Global Forum. And one of the most interesting business leaders here is the woman I’m speaking with today. It’s Joey Wat. She is the CEO of Yum China. Joey, thanks for being here.

Joey Wat: Thank you. Thank you.

Murray:  So tell us what Yum China is. It’s basically a Chinese company, but running a bunch of very American brands.

Wat: We’re actually registered in the U.S.

Murray: You are registered in the U.S.?

Wat: Yeah. And then we are listed on the New York Stock Exchange and also listed on the Hong Kong exchange. And the spinoff happened during 2016. Before that, it was part of Yum!, and there was a lot that happened. It became an independent company because Yum China and Yum!, we are actually very different in terms of business models. I think many people are familiar with Yum!, which is more a franchisee business, whereas Yum China is 90% equity. We run our store ourselves.

Murray: Yeah, so I want to talk about that. But before we do, I mean the Yum! brands are well known to people. It’s Pizza Hut, it’s Taco Bell.

Wat: KFC.

Murray: Kentucky Fried Chicken. We love it. The thing I’d like to ask you first, so we’re living in a time where you read a lot in the press about tension between the U.S. and China and decoupling of the economies. Your brands, very American brands, are doing gangbusters in China, right?

Wat: Indeed, indeed. We actually had a record year in terms of sales profit and new store openings. Even [just by the] third quarter, we have made more money than, you know, last year the entire year and any other previous year in the last 36 years in China.

Murray: So there’s no sign that Chinese consumers are turning away from those iconic American brands.

Wat: Not as far as I know. I mean, not only in our industry, if you look at the shoe industry, you know, computer [and] electronic industry and then apparel industry, American brands from other countries, as long as you are on top of your game, I think we have done quite well.

Murray: Yeah. So how do you explain that? We read so much about decoupling tensions between the U.S. and China. In the technology industry in particular you see increasing division. What does it tell you that customers are still flocking to these iconic America?

Wat: I think there are a few things here. One, I think there are some headline risk or bias right now to us, the country, the macro, etc., etc. The second is, in terms of industry, if we look at China’s GDP growth, you can argue what is 4% or 5% this year. In my industry it’s double digits, actually it’s high double digits.

Murray: Wow.

Wat: So, consumer industry are still doing incredibly well. And there are a few reasons here. One is, at the end of the day, consumer industry, we are looking for customers. You know, just to give you a sense. KFC and Pizza Hut, after 36 years in China, we operate in 1,900 cities only. So there are still 1,100 cities in China that have zero KFCs.

Murray: I can’t believe you said 1m900 cities “only.”

Wat: Correct.

Murray: 1,100 cities. And do you, or do you want—do you want them all? I mean—

Wat: At some point and then KFC is in 1m900 cities and Pizza Hut, we are only in 700 cities. So even between KFC and Pizza Hut, there are still 1,200 cities have zero Pizza Hut and have KFC. So that gives you a sense the size of market. And with our presence in China, of those 36 years, we only are serving one-third of the total Chinese population, and that’s still two-thirds of the Chinese population, that either our prices are still too expensive, or our store is just are not far away and close enough to the customer. So that gives you a sense why the consumer industry is still so excited about a market like this.

Murray: And so how rapidly are you expanding? How fast you open opening new stores?

Wat: Fast. I mean, we have about 14,000 stores in China and 90% are our own equity stores. We have over 430,000 staff running these stores ourselves. Only 10% is franchisee, which is very, very different from the typical restaurant business. And this year alone, we’re going to open around more than 1,300, maybe 1,400 stores. So we are really at the very fast pace of expansion and actually.

Murray: That’s like three or four stores every day.

Wat: Yeah, Yeah, every few hours a store.

Murray: You cut the ribbon at every one?

Wat: No. I cannot, cannot, cannot. Yeah.

Murray: So, let’s go back but go back for a minute, to 2016. I mean, this, of course, what you’re saying—this huge size of the Chinese market is why American consumer companies wanted to be in China.

Wat: And same as many companies from other countries.

Murray: Yes, everyone wants to be there, because potential—it’s such a huge market. But when the decision was made in 2016 to spin Yum China off from the parent company, what was the main reason for that? Was it because the business model was different?

Wat: Definitely. Because it is a completely different way to run a business, with mainly franchisees-driven, because you when you have a business like that, you want to make sure your headquarters is very lean, have very little fixed cost, etc. Whereas with Yum China, we have our own supply chain. We have an in-house supply chain. We have hundreds, if not thousands, of our own IT staff to work on the technology. We have a gigantic workforce. So it’s a very different business model. And then to separate the two companies allows investors to match the business model with their own investment thesis.

Murray: And not get confused.

Wat: Correct. And I think so far, our business has done reasonably well.

Murray: And why does the franchise model not work in China? Why not do franchise?

Wat: It’s a really good question. Right now you see a lot of franchisee model in China. But back to 30-some years ago, we our company, my predecessors the founders of Yum China, made a very conscious decision to invest in equity stores for a lot of reasons. One reason is, it’s a very profitable business. When it’s so profitable, the incentive to do the franchisee is not there. And even today, when we are opening, you know, 1,300 or 1,400 stores a year, the payback for KFC is still two years, and the payback for Pizza Hut is still three years. And that’s a really high payback. And therefore, the incentive to let go and to let the franchisee do it is not that high. But there’s one little problem with equity stores, is that the speed of expansion is slower than franchisee stores. However, in the last eight or nine years, we have built up our infrastructure in terms of 18 years of operation. So we are at the point and we can open these stores as such high speed. Yeah, I would say.

Murray: Yeah, I was going to say that 1,400 a year sounds like a fairly, fairly high speed. Wow. It’s really impressive. So take it down to the consumer level. If I walk into a KFC in Guangzhou, how is it different than KFC in Kentucky?

Wat: It’s rather different. First of all, for breakfast, we have a very big breakfast business. Ninety percent of the food there is from the oven, not from the fryer. For the normal meal, 60% are from the oven, not from the fryer. And this is rather unique, because not all the QSR restaurants or even KFC outside China have ovens in the kitchen. We can have such a good mix, because we have the cooking equipment.

Murray: So outside of China, the sales are overwhelmingly fried foods?

Murray: Completely different. How about Pizza Hut? Is it similar?

Wat: It’s very different too. The biggest selling pizza in China is actually durian pizza.

Murray: Durian?

Murray: What’s durian?

Wat: Okay, There you go. It is called king of the fruit. It is something that either you love it or you hate it, it has rather strong fragrance.

Murray: You know it when you’re eating it.

Wat: You if you hate it, you will go off my restaurant but is doing incredibly well. And then we are also one that the biggest steakhouses in China.

Murray: Yeah. Wow. And you also have some native Chinese brands?

Wat: Yes Yeah. Little Sheep and Huang Ji Huang, which is the hotpot and the other one is steam pot.

Murray: Yeah. And are you trying to build more of them?

Murray: So over time, Yum China is becoming more and more of a Chinese company.

Murray: One-third of the total.

Murray: In one province alone.

Wat: One province alone. So that give you a sense of scale, and how much customers in China love KFC brands.

[music starts]

Jason Girzadas: It’s a pleasure to be with you, Alan, and we are privileged to sponsor this important podcast.

Murray: Well, it’s great to have you. This whole notion of generative A.I. is really exploded onto the scene and into our consciousness in the last year. It’s the fastest introduction of a new technology in history. How do business leaders deal with that, and how do they separate the hype from the opportunity?

Girzadas: It’s a great question, Alan. The hype is real, but we also think the opportunity is more real, and in fact, an imperative for all businesses. The opportunity right now for businesses is around taking advantage of generative A.I. and other digital technologies for efficiency and productivity gains with the belief they will continue to evolve and mature, such that there are other opportunities for value creation, and new disruptions and innovations that we haven’t even seen the possibilities of. The challenge is just to balance this opportunity. As a result, businesses have to diversify their approaches. It’s a CEO-level priority, an understanding of where and how these models are being put to use in your business operations. What are the controls put around data and data quality? As well as ensuring that the models are tested and actually validated like you would do any other customer-facing or highly sensitive system in an enterprise environment.

Girzadas: Thank you.

Murray: So let’s talk a little bit about you there. There are not that many women. I mean, this is a large company. Are you the largest, by the way, the largest restaurant business in China?

Murray: And if you’re not the largest now, you’re going to get there either at the rate you’re going. How did this happen? There are very few women running large companies in China.

Wat: Well, there are lots.

Murray: Well, it’s single-digit percentage.

Murray: Yeah, yeah. How did you get into this position? Tell us the Joey Wat story.

Wat: I was born in China, but I moved to Hong Kong when I was 9. And I started to work, actually. That was the characteristic of that time. And then I grew up in Hong Kong and I was in consulting and then I got this opportunity to move to the U.K. back to 2004 and I spent 10 years there, and that’s when I made the transition from consulting to running business, specifically turning around stores for retail business. So I turn around…

Murray: Restaurants.

Murray: Giving you more and more risk.

Murray: Was there a contest for CEO? The decision was made before the spinoff, correct?

Murray: They came to you and asked you to run the…

Wat: To run the KFC. And then at that time as a CEO who ran the entire Yum China. But then later on, they decided to give me more to eat.

Murray: Yeah. Wow. Fascinating. Well, you obviously have earned your position. Did you always want to be a CEO?

Murray: How do you do that? How do you come to with so many stores in so many places and different brands, different things, how do you come to have that intuitive feel of your customer? What do you do? Do you visit stores? Do you work in stores? What’s your method for staying in touch with the customer?

Wat: Stay in touch with customer. Also, stay in touch with the staff. Both are incredibly important. If I had to choose, I would say stay in touch with the staff is even more important.

Murray: Interesting.

Murray: You know, that’s an interesting—it’s interesting you say that, because I hear people talk a lot these days about empathy. But I think 10 years ago, I never heard CEOs really use the word…

Murray: Empathy. You feel like that’s been important to you personally?

Murray: So when you’re hiring people, you’re hiring people for empathy.

Wat: That’s the number one. That’s number one. Number one, because the reasons that we have our store manager conference, huge, 12,000 people in Macau. And I was very clear with our team that the moment we lost the empathy for the frontline staff, that would be the moment to not that decline of Yum China. For sure.

Murray: Wow. I want to talk about technology. You started a few minutes ago to talk about how a much smaller number of people are running, a larger number of stores. What are the main technological breakthroughs that you’ve had in recent years, and where does it go from here?

Murray: Can you give me one example?

Wat: One example. Payment. Over 90% of our payment right now is digital, and that’s $8 billion.

Murray: Wow. In?

Murray: Wow.

Murray: When you visit stores, other parts of the world, are you far are you way ahead of them on automation?

Murray: Do you—do you share ideas with—?

Wat: Absolutely. Were very, very open about it. I mean, even during the pandemic, when our staff came up with contactless delivery, the first thing we did, which we share with the rest of the world because it will be useful. So we have always been very open minded.

Murray: Do you have people who run franchises in the United States, for instance, coming to China?

Murray: Yeah, I know you’ve put sustainability in a very important place.

Wat: Yes, indeed.

Murray: Can you explain why and also whether that’s common in China?

Murray: Really?

Murray: In China. Wow. That’s very impressive. So you do these things, you take care of of employees with special needs. You devote one yuan to charity. You have an environmentally sound practices, clean energy. You do them because they’re good for your business.

Murray: Wow. And unlocking wealth and happiness unlocks engaged customers. Absolutely happy employees. And that helps your business.

Wat: Absolutely.

Murray: Yeah. Joey Wat. Fascinating conversation. Thank you so much for being here at the Fortune Global Forum in Abu Dhabi. But thank you also for taking the time to talk with me. Thank you so much.

Murray:  Leadership Next is edited by Nicole Vergalla.

Lev-Ram: Our executive producer is Megan Arnold.

Murray:  Our theme is by Jason Snell.

Murray:  Leadership Next episodes are produced by Fortune’s editorial team. The views and opinions expressed by podcast speakers and guests are solely their own and do not reflect the opinions of Deloitte or its personnel. Nor does Deloitte advocate or endorse any individuals or entities featured on the episodes.