Pizza Delivery In China

Pizza Delivery Gets Big Push In China

Restaurant giant Yum Brands Inc. is betting that, as China's expanding middle class continues to demand more of the typical Western middle-class lifestyle, consumers will develop a taste for one of America's favorite convenience foods -- pizza, delivered.

Pizza delivery, ubiquitous in the U.S., is a new concept in China, where dining out has long been seen as a form of conspicuous consumption. As a result, until recently Yum had focused on positioning its Pizza Hut locations as a "five-star experience, (with a) three-star price" that would attract Chinese consumers looking for a night on the town. But as China's wealth swells -- along with its legions of harried office workers who have less and less time to cook at home -- pizza delivery is beginning to look like a faster way to expand the Pizza Hut brand, and consumers have begun to respond.

During the past year, Yum has been ramping up delivery operations in the country -- building call centers, securing a nationwide telephone number and building out new locations at an expeditious rate.

"We think we could build thousands of these," said Yum Chief Financial Officer Rick Carucci. The company has 61 delivery-only locations, up 49% from a year ago, and plans to continue at that rate for the next year.

The reason for their appeal to Yum is simple economics: Delivery-only locations, unlike fine-dining establishments, don't have to occupy prime (read expensive) real estate and can still pull in 60% to 70% of the revenue of fine-dining locations, and they are already making money. Yum's China division aw its operating profit jump 38% in the second quarter, and Pizza Hut was the division's fastest-growing brand.

To be sure, Yum faces risks in its expansion. Domino's Pizza, the dominant delivery-only brand in the U.S., has been slow to move into the Chinese market, noting the lack of a convenience culture that would demand food delivery. But that is changing: Domino's has built central delivery commissaries in Shanghai and Beijing -- a sign they will build out in the near future.

"I think for a couple of years they were skeptical that there was going to be a delivery business there," Bank of America analyst Joseph Buckley said. "Now they think there is; it could be because of what Pizza Hut is doing."

Yum, whose China group's slogan is "Rooted in China, Part of China," says it is just following the market.

When lawyer Zhan Zhao moved to Beijing in 2002, after spending his teenage years and getting his education in the U.S., he was shocked to find no food-delivery service was available.

"I was a lawyer working long hours and new to China, so a service of convenience was something that I really needed to help adjust to the other realities of modern-day China," said Mr. Zhao, 32 years old, an associate at Skadden, Arps, Slate, Meagher & Flom LLP. To fill the gap, he started a delivery service, Beijing Goodies, to deliver food, at an additional price, from Beijing restaurants. After a rocky start in May 2002, the business has taken off in recent years. Today, the company has 7,000 registered users in Beijing -- and Mr. Zhao, who now lives in Shanghai, sees food delivery as a growth market.

"Food delivery will only become more and more popular, especially for the local white collars, as the Chinese consuming public continues to work longer and longer hours," Mr. Zhao said.

Yum's recent television advertising campaign in China makes a similar case. One ad, for example, shows a young mother rushing from work to the market, cooking dinner and doing dishes, contrasted with a serene woman stretching and enjoying her afternoon. The serene woman has already ordered pizza, and a moped-mounted delivery man is on the way with it.

Papa John's, which recently opened its 100th restaurant in China, has been noticing a pickup in delivery orders, too, according to David Flanery, the company's chief financial officer and head of its international operations.

"The delivery percentage has probably doubled over the past two to three years," Mr. Flanery said. "You go through those cities and see apartment building after apartment building and you go, 'you know, those people have to eat, and more of them have enough money to go to a restaurant and have something delivered.'"

Mr. Flanery said Papa John's is more than happy to follow Yum's lead in the country, where Yum already has a massive head start. Yum was the first Western fast-food company to gain entrance to China in the 1980s, and its KFC chain is one of the most recognized Western brands in the country, with 2,264 locations as of June 30.

Mr. Carucci said he expects Yum to ramp up the building of Pizza Hut delivery locations during the next year or so, moving into more second-tier cities, with the eventual goal of China being a bigger market than the U.S.

"We're off to the races on delivery," Mr. Carucci said.

Source: Dow Jones Newswire

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