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.

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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?

Wat: Probably. And then the menu choice is much bigger in China. To give you a sense, a regional recipe, chicken, which is huge, it’s only 6% of sales, and we have a very big beef burger business. We have very big whole-chicken business. We have a big, you know, rice business, and the menu, it’s good food. It doesn’t matter whether it is American food or Chinese or Southeast Asian, it doesn’t matter.

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?

Wat: Yeah. Yeah.

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?

Wat: Absolutely.

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

Wat: Well, we are an American company, but we operate in China, and the market is still so big. To give you a sense­—and with the speed of expansion it’s hard not to focus on it—around the world, globally, KFC has 29,000 restaurants around the world in 150 countries. In China, next month, December 15, we’re going to celebrate 10,000 stores. Ten thousand KFC stores alone in China. More than one-third.

Murray: One-third of the total.

Wat: Total. Exactly. And then the other way to look at it, KFC in India just celebrated 1,000 stores, and KFC in Eastern and Central Europe just celebrated 1,000 KFC stores. And last month we celebrate 1,000 stores in Jiangsu province alone.

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]

Murray: I’m here with Jason Girzadas, the CEO of Deloitte US, the sponsor of this podcast. Thanks for sponsoring and thanks for joining me, Jason.

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.

Murray: Jason, thanks for your perspective and thanks for sponsoring Leadership Next.

Girzadas: Thank you.

[music ends]

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?

Wat: One of the largest. Yeah, probably the largest, but one of them.

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.

Wat: Yeah.

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.

Wat: Not restaurants. I turn around two brands there. One is called Savers, the other one Superdrug, which is the No. 2 health and beauty retailer in the U.K. And then back to 2014, I got this opportunity to turn around KFC in China. KFC was in a little bit of trouble, put it that way, in China at that time. I took the opportunity because at that time we already had 450,000 staff, a few thousand restaurants, and right now, we only have 4 30,000 staff for double the number of the stores. How to get there—we can talk about it later. But for me, it worked, because it is very exciting brand. And also, my son, at that time, is at that age that I wanted him to learn Chinese. Yeah. So we moved back to China, back to 2014 and then I turn around KFC, and then later on, you know, when you’re good at eating, you eat more, right?

Murray: Giving you more and more risk.

Wat: Yeah. By 2017, you know, I was given the opportunity to turn around Pizza Hut as well. And then by 2018, I got the opportunity to be the CEO.

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

Wat: 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?

Wat: I would not say I always want to be CEO. I’m always open minded about all the possibilities. That’s why I moved myself from Hong Kong to U.K. But back to 2004, I didn’t know what to expect. But I know I love retail. It kind of suits my personality quite well, because I’m very impatient. I like the details, and I like to feel the customers—is something that as a retailer we operate a lot on, our instincts, or on our understandings of the customers.

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.

Wat: So I started to work when I was only 9 in factories, and then later on, when I was 15, I started to work in restaurants in Hong Kong. And I suppose with all those years of working with the frontline staff, it always makes me very comfortable to communicate with my frontline staff. And the empathy I think, is the most important thing for any retailer around the world.

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…

Wat: Really?

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

Wat: Absolutely. Because honestly for Yum China, we serve only 2 billion customers a year. Only in China. There’s no way that I can interact directly with customers that often. How I get to know my customer is through my store managers? Yeah. And in our culture, we have something called RGM, number one. Restaurant general manager number one. They are the most important group of people who the headquarter people we serve. And now I also learn how to serve customers through my restaurant managers. Not the recipe from the customer, because this would be quite hard to aggregate, but my good store managers, they always have a very good sense about what the customers really want.

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?

Wat: It’s a really good question. I’m really pleased that you point out over the few years, because it’s not something people can say, I decided to do it, it happens this year. It doesn’t work that way. We’ve been working on it since 2014, -15, and we finally get to the point that we say, okay, this phase of digitization is sort of complete, and then we need to start the next milestone. The next milestone is A.I., but for the entire journey, 2015 till 2022 almost. How did that happen? Well, I’ll talk about the result, then we’ll talk about how. The result is, we can put a lot of repetitive administrative work or tasks in the store into something that can be done by the A.I., or automation.

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?

Wat: That’s $8 billion in sales that is done through digital payment. So in the past, I might have three people, four people, five people taking money. Now I have one.

Murray: Wow.

Wat: Or less than one, to be specific, because people pay through digital. So that is sort of thing that we are talking about, but that’s one example. And then we move back to the restaurant operation, how to plan the production, when to get the chicken ready, when to get ready to wait for the customer coming in. All this planning is done by A.I. right now. And then to move my inventory around from the supplier to the logistics center to the store. It’s all done by A.I. right now, and then go all the way back to the integration with the supplier. So the automation, digitization, that process takes a very long time.

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

Wat: Probably. But I might be wrong. I mean, there are many cool things out there that  people are doing. and what do I know?

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?

Wat: We have people in the same industry or other industry who came to visit us and we are quite open-minded about it.

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?

Wat: Why? Because we are very proud that, for 36 years, we are always part of the community. We are there to serve the community. So it’s just part of the culture. We focus on three areas—people, food, environment—because sustainability is very big topic. People. Why? Because if we cannot keep our business going, we are not going to be around to help the environment or anything. Okay, So number one, sustainability is our jobs. Actually. And we take good care of our people. For example, in over 100 cities in China right now, we have food bans. In over 40 cities in China right now we have something called angel restaurants, which is about stores in which more than half of the employees have special needs.

Murray: Really?

Wat: Yes. It changed the dynamic. It’s interesting—when a store only has a small number of employees with special needs, they’re the minority. When more than half of the employees have special needs, they become the mainstream. Then we, like my store managers and other people, have to learn the sign language and other things, and the store environment is very quiet, very nice, and then they feel proud and then they support each other. And then when it comes to food, we have food bans, and we have, you know, work on this campaign called One Yuan Donation. For 16 years now. And we raised the money from the customer. We only ask for one yuan. No more than that. Why? Because we want children to experience donation. One yuan does not hurt at all. So a lot of kids actually spend a donation for the first time in KFC and then we use the money to, at the beginning, have preferred mainly milk and egg for children in a remote area, and now the government takes good care of it. So we redirected the money to built modern and very highly efficient kitchens for the schools in remote area and then the environment. Of course we are coming to the 2050 carbon neutral target, which is, you know, on the way, and we just just have the first logistics center run completely on renewable energy in China.

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.

Wat: They’re good for business as just the right thing to do. And this another reason you can call a selfish reason or not to do it is I think, the group of people who benefit most from all this initiative, we have a lot more, by the way, from this initiative, actually, is our own staff. We pay our staff with a competitive pay, but we will make them rich overnight. However, we do believe that realization, the realization that giving is better than receiving, is the biggest source of unlocking wealth and happiness in life.

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.

Wat: Thank you.

Murray:  Leadership Next is edited by Nicole Vergalla.

Lev-Ram: Our executive producer is Megan Arnold.

Murray:  Our theme is by Jason Snell.

Lev-Ram: Leadership Next is a production of Fortune Media.

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.