With nearly 40,000 restaurants in more than 120 countries, Yum! Brands (NYSE:YUM) owns some of the strongest brands in the restaurant industry: KFC, Taco Bell and Pizza Hut. Even a chain as huge as Yum!, however, can keep expanding aggressively. The key is to focus on Asian markets, where 60% of the world's population is located.
Of course, burger chains McDonald's (NYSE:MCD) and Burger King Worldwide (NYSE:BKW) are also very interested in becoming the leading fast-food chain in emerging economies, and all are looking to Asia as a major revenue growth engine. In this highly competitive scenario, how does Yum! plan to conquer the Asian markets?
The race for Asia
To capture a first-mover advantage, Yum! is quickly expanding in Asia. Last year, Yum! had 889 new restaurant openings in China. It also opened more than 700 new restaurants outside of the U.S. and China.
However, Yum!'s international plans go beyond increasing its number of locations. To strengthen its brands abroad, Yum! relies on building strong local teams. And to keep high food- and service-quality standards, the company relies on its massive global supply chain and its nearly 1,000 international franchisees.
The results of international expansion have been amazing. With 14,700 restaurants outside of the U.S., China, and India, in 2012 Yum! had system sales of $17 billion and operating profits of $715 million. China is set to become Yum!'s main growth engine thanks to average unit sales of $1.7 million last year, which exceed most other restaurant chains.
But as competition gets increasingly fierce, Yum! is finding it harder to keep up with high growth expectations, especially in China. Last week, Yum! missed revenue and earnings consensus estimates for the latest quarter. This was caused by a deceleration in same-store sales in China due to increasing competition and a short-term contraction in consumption.
With China's GDP and consumer spending expected to triple between 2010 and 2020, short-term macroeconomic cycles do not represent a major problem for Yum!, which earns more than half of its total profit in China. However, fierce competition does.
In an attempt to capture more market share, McDonald's is focusing on improving its menu quality. For example, this year it launched a "rice-based" menu, which includes chicken and beef rice wraps for less than $3 a piece. The company also seeks to open 275 restaurants this year. Although Yum! has market share advantage here, McDonald's -- which occupies the leading position in practically every country, with the exception of China -- can deploy huge resources, representing a major threat. More investment in menu improvements, decor, Wi-Fi offerings, and marketing is expected.
On the other hand, despite having entered the Chinese market eight years ago, Burger King is still far away from reaching McDonald's and Yum! in terms of the number of locations, revenue, and brand strength. Burger King will need to continue reinventing its menu, increasing its number of locations, and strengthening its partnerships if it wants to get a significant share of China's $29 billion fast-food market.
Burger King also has a minor share of the Japanese fast-food market. With less than 20 restaurants, the company faces fierce competition from McDonald's 3,750 locations. However, the company has tried to differentiate its products by targeting mainly the high-end segment. That is why Burger King hamburgers tend to be more expensive. The company is also constantly innovating its menu -- for example, it started to offer cocktails in certain locations -- and promoting its brand as a reasonably priced dinner rather than a cheap fast-food restaurant.
Final Foolish thoughts
To protect its business against fierce competitors such as McDonald's or Burger King, Yum! should not only increase its number of locations in key Asian markets but also innovate its menu continuously.
Yum! showed great business sense when it created East Dawning -- a fusion of its KFC business model with Chinese cuisine -- to attract more Chinese customers, and when it acquired hot-pot restaurant chain Little Sheep. Similar actions, combined with a smart marketing strategy, should allow Yum! to continue expanding its operations in China, India, Indonesia, Vietnam, and other emerging economies.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.