Yum! Brands is determined to expand in the UK despite a global economic slowdown and profit warnings from McDonald’s. By Stacey Meadwell
Yum! Brands may own KFC, one of the world’s best-known fast food names, but when fast food king McDonald’s announced its first ever loss in its 65-year history at the beginning of this year, it got the whole market worried.
The loss, the company said, was the result of a one-off charge of £494m relating to store closures. More closures are planned but the burger giant still sees potential in the UK market with plans for 44 new restaurants this year.
Yum! which also owns Pizza Hut sees potential in the UK market despite the McDonald’s wobble and the slowing economy. Indeed, it has plans for large-scale expansion this year. This is a curious move given that Mark Upton, Pizza Hut’s senior acquisition manager in the UK, admits that the pizza emporium is not recession-proof.
“We will be affected by the downturn but not as much as others,” he says. Pizza Hut has already spent £20m rebranding and refurbishing its existing portfolio.
Nicky Finnieston, chief negotiator – corporate restaurants at Christie & Co agrees that Pizza Hut’s offer and indeed KFC’s will see it through the hard times. “They are quite recession-proof because people stop eating out at the top and middle end of the market,” he explains.
Pizza Hut is keen not to fall into the sales transfer trap by opening up too many restaurants too close to each other. Upton says Pizza Hut has an in-house market planning system to identify the best market locations. But, more importantly, it is testing the sales transfer theory by trialling units close to existing ones to examine the effects. “So hopefully we won’t get caught in that [sales transfer] trap,” he comments.
McDonald’s is still a major rival to KFC and a threat to its expansion plans. Paul Stokes, senior acquisition manager in the UK for KFC, enthuses that for the first time KFC could potentially open more new stores than McDonald’s this year.
He adds: “McDonald’s will be chasing the same good sites that we are. Supply is the only thing that will stop us reaching our target of openings.”
When direct comparisons are made with McDonald’s, Stokes is keen to add that KFC has enjoyed positive sales growth and it is starting from a lower base than McDonald’s. To help overcome problems of finding sites and getting planning permission, Pizza Hut’s Upton has an in-house team and uses a network of developers and local agents to search for sites.
A new strategy that could leapfrog many difficulties for the high street names is a double-decker concept store with KFC at ground level and Pizza Hut at first floor (see panel). Both companies are now looking at more immediate areas of growth.
For Pizza Hut, there are several targets: smaller units with out-of-town retailers, converting former pubs; the slice bar, and road-side restaurants.
The new push
With out-of-town retailers, a recent opening saw Pizza Hut taking a unit at the front of a B&Q store in Chippenham. The acquisition team is also targeting existing buildings such as pubs for conversion. The Poacher’s Pocket in Weston-super-Mare was acquired for this reason last year.
There is also a big push with the smaller takeaway units, or slice bars as they are known, in shopping centres.
The slice bar, says Upton, is the result of a more flexible approach to design as they can be accommodated in as little as 1,000 sq ft. Pizza Hut has two of these formats, one in the Arndale Centre in Manchester and the other at Chessington World of Adventures. And there are another four or five in the pipeline this year.
KFC’s strategy differs in that it does not see a future in the small takeaway units that were popular in the days when the company was owned by Pepsi. Like Pizza Hut, substantial sums are being spent revamping existing restaurants with what Stokes describes as “brighter and fresher” interiors. Areas of wooden flooring are being used to break up the tiles and wooden furniture has been introduced.
The takeaway units, which are generally in suburban areas, are not seen as part of the way forward. Stokes explains: “They are not visited by shoppers or convenient for cars. It is where all the copycat brands are and it dilutes the KFC brand.”
The takeaway formats will slowly be closed and the focus is on high street restaurants and drive-thrus.
The challenge for the nine-strong acquisition team is to find high street units of the right size and shape to cope with what is predominantly a lunchtime trade. KFC is prepared to pay high street prices for the right unit – in fact Stokes says it has paid six-figure sums in the past. The company has introduced “speed kitchens” where food is pre-prepared, in the same way as the burger restaurants.
Planning is a problem both on the high street and with drive-thrus but in the town centres Stokes believes it is about changing the mindset. “When people are shopping they like to make snap decisions about where to eat which is why food courts are where they are,” he explains. It is often a case of then persuading the planners that on the high street, among the shops, is where shoppers like to eat, he adds.
Sites for drive-thrus are also in short supply as the opportunities on retail and leisure parks and at supermarkets are drying up. Like Pizza Hut, KFC is also looking at in-fill sites and old pubs, petrol stations and car showrooms.
The drive thru is the chain’s most successful concept because the price of property is more uniform compared with the high street, and they generally trade over lunchtime and in the evening.
Parent company Yum! is also keen to trial one of its US concepts – A&W Burgers – in the UK. It is embarking on a multi-branding exercise by adding in an outlet for its burger and hotdog offer.
How A&W Burgers fare in a market, which is seeing some of the big guns take a hit, will unfold over the next couple of years.
If consumers like the “retro feel” of the burger and hot dog offer then KFC could find itself jostling for position on the high street with yet another burger chain.
The novel way to gain presence
In a world where planning restrictions are tight and supply of land tighter, Yum! Brands has come up with a novel solution to ensuring that both its UK brands get their fare share of market presence.
The company is in the process of agreeing designs for what it describes as “double-decker” units with a KFC drive-thru at ground level and a Pizza Hut restaurant on the first floor. KFC’s Paul Stokes explains: “If both brands are looking at a site but it is not big enough for both, we are looking at putting the units on top of each other.”
Pizza Hut’s Mark Upton adds: “A lot of sites around London and the M25 are expensive and small. You need 0.5 acres for a stand-alone unit and 0.8 acre for a double-decker.”
Stokes says it is not an ideal solution, but it may just make one or two more sites economically viable, “especially when you are competing against residential developers”.
● Pizza Hut in the UK is owned by Yum! Brands and Whitbread.
● It has more than 500 outlets including 350 dine-in restaurants in the UK and 170 home delivery units.
● Having opened 62 new outlets in 2002, plans are for 50 full-service restaurants during 2003, and 50 home delivery units with a budget of up to £20m.
● A further 100 stores are planned for 2004 with the aim of becoming the fastest growing brand in the UK.
● Pizza Hut has 12,000 outlets worldwide in 90 countries. A typical restaurant on an infill site is 10,000-20,000 sq ft.www.pizzahut.co.uk
● KFC is a division of American company Yum! Brands and has 600 restaurants in the UK with the eventual aim of founding 1,000.
● In 2002, KFC opened 56 new restaurants and has plans to open a further 58 this year with a budget of up to £30m to spend on acquisitions.
● KFC was the first quick-service restaurant to come to the UK.
● It now has 9,900 restaurants worldwide in 82 countries.
● KFC was started by Colonel Harland Saunders in 1950 and came to the UK in 1965.
