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The Weird Way KFC in China Carved Out Some Extra Sales

By Motley Fool Staff – May 3, 2019 at 3:17PM

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Usually, if you’ve seen one Yum! Brands quarterly report, you’ve seen them all. But the fast-food chain operator's Yum China spinoff delivered a plot twist this time around.

The first-quarter report for Yum! Brands (YUM -0.76%) can be summed up by the U.S. same-store sales results for its trio of chains: Taco Bell's comps grew nicely, KFC's comps growth was decent, and once again, Pizza Hut's comps were disappointing.

In this segment of the MarketFoolery podcast, host Chris Hill and senior analyst Aaron Bush discuss the massive opportunity Yum! is failing to capitalize on in its domestic pizza market. But the more interesting tidbit for investors may have come from its Yum China spinoff: Same-store sales for Chinese KFC restaurants got a big boost because they started selling a part of the chicken that wasn't previously used.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 1, 2019.

Chris Hill: Yum! Brands' first quarter was pretty much like every other quarter.

Aaron Bush: This is the most important story!

Hill: This is the most important story. It's worth remembering that Yum! Brands spun off their China business into a separately traded stock, Yum China. Yum! Brands, the U.S. story continues to be what it seems like it is every quarter: "Hey, same-store sales at Taco Bell look good. KFC was pretty good. Pizza Hut was flat or negative." In this case, it was just flat. Pizza Hut continues to not... [groans] It's pizza! How are they not -- someone is going to write an article a year from now about the completely blown opportunity at Pizza Hut. Papa John's lit itself on fire from a business perspective, and it was the perfect opportunity for Pizza Hut to take market share. Yes, they got the NFL sponsorship, but it's not showing up in the sales! Anyway, that's a blown opportunity.

So, that story is the same as it always is. The most interesting part is Yum China, where the results for KFC were boosted because -- [laughs] I can't believe I'm saying this out loud -- their sales were boosted because they sold parts of the chicken that were never used before. Let me say that again. You want to talk about innovation in restaurants? KFC China is selling a part of the chicken that they've never sold before. CEO Joey Wat was asked about this on the call. She said, "This is a piece of chicken that's between the chicken wing and the chicken breast." I'm not so intimately familiar with chicken anatomy that I can picture what she's talking about, and it was said on the call in Mandarin, and it was not translated, so I don't know what we're talking about here. But I am now insanely curious about this.

Bush: I mean, genius comes in all forms. Whoever came up with that idea deserves a promotion. I was talking to Emily Flippen this morning about this, who fell down this rabbit hole really deep.

Hill: We both know Emily. She didn't fall down, she willingly went down.

Bush: [laughs] Oh, yeah, she willingly skydived down that rabbit hole. But, what she was saying was also disruptive about this is, that because this part of the chicken has been traditionally deemed undesirable, KFC was able to purchase it at really low prices, and then also able to sell it at really low prices. It's a way to bring people in for something new and something cheap. But she also told me a stat that blew my mind. How many loyalty members do you think KFC in China has?

Hill: Oh, this is just going to upset me, I know. I'm going to go high and say 40 million.

Bush: 175 million.

Hill: Oh, my -- !

Bush: Isn't that insane? Most streaming sites would love to have the amount of loyalty that KFC China has. 175 million people! I totally understand, they're working with a lot of people. They're working with Facebook numbers [laughs] to bring people in.

Hill: That's insane!

Bush: Yeah, that's wild! Also, I'll say, I know you were talking bad about Pizza Hut earlier. Apparently, one of Yum! Brands' partner companies is Telepizza. Emily also showed me this today. She was saying that they just launched the Telepizza Burger, where instead of the meat and vegetables being on top of the cheese, it's now in between the bread and the cheese. More innovation going on at Yum! Brands.

Hill: We have to bring in our man behind the glass, Dan Boyd. Dan, what's your reaction to all this?

Dan Boyd: Well, Chris, I don't know if you've had lunch yet, but how about you and I go down to KFC and get some chicken armpits?

Hill: [laughs] See, sadly, I don't think they're selling them here. At least not yet.

Boyd: Not yet, Chris! But we'll get our chicken armpits before too long, I'm sure.

Hill: I guarantee you someone at KFC here in the United States has got a team working on whatever the branding is going to be. If it really is a situation where we can buy this part for not a lot of money, we can sell it for just slightly more money, we can do this in a profitable way, they are going to rebrand it. It's not going to be chicken armpits, but it's going to be something.

Boyd: Chick pits! [laughs] Sorry! We're so bad!

Hill: [laughs] We're going to work on this. Well, we're not going to work on this. We don't have to, we're not getting paid to work on this. The people at Yum! Brands down in Louisville, they're working on this.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of FB. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.

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