NEW YORK (Reuters) - KFC and Pizza Hut parent Yum Brands Inc (YUM.N) on Thursday said it is rethinking where it opens new restaurants in China and accelerating openings of its high-margin pizza chain in that country, where business has slowed.
Yum said rents and labor costs have gone up in China’s largest cities, hurting restaurant profitability.
“We will be more selective in our pace of expansion in these areas,” Yum China Chief Financial Officer Weiwei Chen said at the company’s investor meeting in New York City.
Yum shares rose 2.3 percent, or $1.51, to $67.41 on Thursday morning as the company laid out its China plans. Last week, its shares tumbled from an all-time high of $74.74 hit just before Yum warned that it expected same-restaurant sales in China to fall 4 percent in the fourth quarter.
Yum gets more than half of its revenue and operating profits from China.
Chen said restaurants in China’s smaller cities have better returns due to lower costs and “consumer enthusiasm for our brands” - so the company is focusing building efforts in those areas.
Yum also is speeding up openings of Pizza Hut restaurants because they have better margins and less competition, she said.
Yum expects mid-single-digit percentage same-restaurant sales growth in China for 2013. Chief Executive David Novak told investors he was “very confident” that the company would turn in “very solid” sales growth next year at established restaurants in China, its top market.
Yum is no stranger to volatility in China - indeed, the company posted declines there in full-year same-restaurant sales — an important performance measure for restaurant companies — in 2005 and 2009.
Novak said some of the fourth-quarter’s underperformance could be attributed to cooling economic activity in China, which is still the world’s fastest-growing economy.
Novak, who is also Yum Brands’ chairman, said he expects next year’s same-restaurant sales in China to be stronger in the second half, after a softer first half.
Editing by Gerald E. McCormick, Bernadette Baum and David Gregorio