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UPDATE 1-Yum China aims to triple restaurants as challenges loom

(Adds executive comment)

By Lisa Baertlein

Oct 11 Yum Brands Inc said it can triple the number of restaurants in its China division, which is being spun off after a string of sales setbacks that have raised the risk profile of the company's top profit generator.

Yum opened its first KFC in China near Beijing's Tiananmen Square in 1987, beating major rivals to the country. It has been China's biggest Western restaurant operator for years and now has more than 7,300 KFC and Pizza Hut outlets there.

"I really don't see any reason why we cannot have 20,000 restaurants in China," said Micky Pant, chief executive of Yum's China division, which will be spun off on Oct. 31.

But Yum China's once-predictable growth has been called into question. It has grappled with internal and external challenges in recent years, including marketing blunders, rising competition, bird flu outbreaks, food safety problems and slowing economic growth.

Earlier this month, executives blamed anti-U.S. protests sparked by political tensions in the South China Sea for a surprise 1 percent drop in sales at established China restaurants during the latest quarter.

Pant said those sales were recovering and described the division's first same-store sales drop in five quarters as a blip, telling Reuters, "the fundamentals of the brands in China are very strong."

Pant said Yum China will have 15 percent earnings expansion in the world's fastest-growing economy and that it will open restaurants in burgeoning mega cities, major transportation hubs and new shopping malls. The company also plans to open Taco Bell and Little Sheep restaurants, albeit at a far slower pace than its two dominant brands.

Partners Primavera Capital and Alibaba Group Holding Ltd affiliate Ant Financial, which will buy a $460 million stake in Yum China, bring competitive advantages such as local real estate market knowledge and digital leadership, Pant said.

Yum China already is the biggest user of Ant's popular Alipay service and the restaurant operator is investing in making its mobile ordering system and loyalty programs even more robust, executives said.

Analysts say KFC, which accounts for roughly 70 percent of Yum's restaurants in China, still has plenty of room to add new units but suggest its limit may be lower than the company's long-term target.

China has about 4 KFC stores per million people and its level of "Peak KFC," or restaurant penetration, is likely to be equal to Japan's at 9 stores per million people, rather than the 13 stores per million people in the United States, Bernstein Research analyst Sara Senatore said in a recent note.

Pant told Reuters he "can absolutely see getting" to 12 KFC restaurants per million people in China, equivalent to a tripling of the business.

(Reporting by Lisa Baertlein in Los Angeles; Additional reporting by Shanghai newsroom; Editing by Jeffrey Benkoe and Meredith Mazzilli)

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