On a current episode of Fortune’s Leadership Next podcast, co-host Alan Murray talks with Joey Wat, CEO of Yum China. The corporate, which is listed on each the New York and Hong Kong inventory exchanges, was spun off from Yum! in 2016. Wat, who began working at age 9 in a manufacturing unit in Hong Kong, oversees 14,000 shops throughout manufacturers together with KFC, Pizza Hut, Taco Bell, Little Sheep, and Huang Ji Huang. About 90% of the eating places are company-owned, with simply 10% run by franchisees. In 2024, Yum China will open greater than 4 new shops per day.
Co-host Michal Lev-Ram was off for this week.
Hearken to the episode or learn the complete transcript beneath.
Transcript
Alan Murray: Management Subsequent is powered by the oldsters at Deloitte who, like me, are exploring the altering guidelines of enterprise management and the way CEOs are navigating this alteration.
Welcome to Management Subsequent, the podcast concerning the altering guidelines of enterprise management. I’m Alan Murray, and I’m doing this episode alone. Michal Lev-Ram couldn’t be with me. However I’m in Abu Dhabi, the place we’ve convened enterprise leaders from 30 international locations all over the world for conversations on the highest matters affecting companies, the Fortune Global Forum. And some of the attention-grabbing enterprise leaders right here is the girl I’m talking with at present. It’s Joey Wat. She is the CEO of Yum China. Joey, thanks for being right here.
Joey Wat: Thanks. Thanks.
Murray: So inform us what Yum China is. It’s principally a Chinese language firm, however operating a bunch of very American manufacturers.
Wat: We’re truly registered within the U.S.
Murray: You might be registered within the U.S.?
Wat: Yeah. After which we’re listed on the New York Inventory Change and likewise listed on the Hong Kong trade. And the spinoff occurred throughout 2016. Earlier than that, it was a part of Yum!, and there was quite a bit that occurred. It grew to become an impartial firm as a result of Yum China and Yum!, we are literally very completely different by way of enterprise fashions. I believe many individuals are acquainted with Yum!, which is extra a franchisee enterprise, whereas Yum China is 90% fairness. We run our retailer ourselves.
Murray: Yeah, so I wish to discuss that. However earlier than we do, I imply the Yum! manufacturers are well-known to individuals. It’s Pizza Hut, it’s Taco Bell.
Wat: KFC.
Murray: Kentucky Fried Rooster. We find it irresistible. The factor I’d wish to ask you first, so we’re dwelling in a time the place you learn quite a bit within the press about stress between the U.S. and China and decoupling of the economies. Your manufacturers, very American manufacturers, are doing gangbusters in China, proper?
Wat: Certainly, certainly. We truly had a document yr by way of gross sales revenue and new retailer openings. Even [just by the] third quarter, now we have made more cash than, you realize, final yr your entire yr and some other earlier yr within the final 36 years in China.
Murray: So there’s no signal that Chinese language customers are turning away from these iconic American manufacturers.
Wat: Not so far as I do know. I imply, not solely in our trade, for those who take a look at the shoe trade, you realize, laptop [and] digital trade after which attire trade, American manufacturers from different international locations, so long as you’re on high of your recreation, I believe now we have accomplished fairly nicely.
Murray: Yeah. So how do you clarify that? We learn a lot about decoupling tensions between the U.S. and China. Within the know-how trade specifically you see rising division. What does it inform you that clients are nonetheless flocking to those iconic America?
Wat: I believe there are some things right here. One, I believe there are some headline threat or bias proper now to us, the nation, the macro, and so on., and so on. The second is, by way of trade, if we take a look at China’s GDP progress, you may argue what’s 4% or 5% this yr. In my trade it’s double digits, truly it’s excessive double digits.
Murray: Wow.
Wat: So, shopper trade are nonetheless doing extremely nicely. And there are just a few causes right here. One is, on the finish of the day, shopper trade, we’re searching for clients. You realize, simply to provide you a way. KFC and Pizza Hut, after 36 years in China, we function in 1,900 cities solely. So there are nonetheless 1,100 cities in China which have zero KFCs.
Murray: I can’t consider you stated 1m900 cities “only.”
Wat: Right.
Murray: 1,100 cities. And do you, or would you like—would you like all of them? I imply—
Wat: In some unspecified time in the future after which KFC is in 1m900 cities and Pizza Hut, we’re solely in 700 cities. So even between KFC and Pizza Hut, there are nonetheless 1,200 cities have zero Pizza Hut and have KFC. So that provides you a way the scale of market. And with our presence in China, of these 36 years, we solely are serving one-third of the overall Chinese language inhabitants, and that’s nonetheless two-thirds of the Chinese language inhabitants, that both our costs are nonetheless too costly, or our retailer is simply are usually not distant and shut sufficient to the client. So that provides you a way why the buyer trade continues to be so excited a couple of market like this.
Murray: And so how quickly are you increasing? How briskly you open opening new shops?
Wat: Quick. I imply, now we have about 14,000 shops in China and 90% are our personal fairness shops. We’ve over 430,000 employees operating these shops ourselves. Solely 10% is franchisee, which may be very, very completely different from the everyday restaurant enterprise. And this yr alone, we’re going to open round greater than 1,300, possibly 1,400 shops. So we’re actually on the very quick tempo of growth and truly.
Murray: That’s like three or 4 shops each day.
Wat: Yeah, Yeah, each few hours a retailer.
Murray: You narrow the ribbon at each one?
Wat: No. I can’t, can’t, can’t. Yeah.
Murray: So, let’s return however return for a minute, to 2016. I imply, this, after all, what you’re saying—this enormous measurement of the Chinese language market is why American shopper firms wished to be in China.
Wat: And similar as many firms from different international locations.
Murray: Sure, everybody desires to be there, as a result of potential—it’s such an enormous market. However when the choice was made in 2016 to spin Yum China off from the guardian firm, what was the primary cause for that? Was it as a result of the enterprise mannequin was completely different?
Wat: Undoubtedly. As a result of it’s a utterly completely different method to run a enterprise, with primarily franchisees-driven, since you when you’ve gotten a enterprise like that, you wish to ensure your headquarters may be very lean, have little or no mounted price, and so on. Whereas with Yum China, now we have our personal provide chain. We’ve an in-house provide chain. We’ve lots of, if not hundreds, of our personal IT employees to work on the know-how. We’ve a huge workforce. So it’s a really completely different enterprise mannequin. After which to separate the 2 firms permits traders to match the enterprise mannequin with their very own funding thesis.
Murray: And never get confused.
Wat: Right. And I believe to this point, our enterprise has accomplished fairly nicely.
Murray: And why does the franchise mannequin not work in China? Why not do franchise?
Wat: It’s a extremely good query. Proper now you see a variety of franchisee mannequin in China. However again to 30-some years in the past, we our firm, my predecessors the founders of Yum China, made a really aware determination to put money into fairness shops for lots of causes. One cause is, it’s a really worthwhile enterprise. When it’s so worthwhile, the inducement to do the franchisee isn’t there. And even at present, after we are opening, you realize, 1,300 or 1,400 shops a yr, the payback for KFC continues to be two years, and the payback for Pizza Hut continues to be three years. And that’s a extremely excessive payback. And subsequently, the inducement to let go and to let the franchisee do it isn’t that top. However there’s one little drawback with fairness shops, is that the pace of growth is slower than franchisee shops. Nevertheless, within the final eight or 9 years, now we have constructed up our infrastructure by way of 18 years of operation. So we’re on the level and we are able to open these shops as such excessive pace. Yeah, I’d say.
Murray: Yeah, I used to be going to say that 1,400 a yr seems like a reasonably, pretty excessive pace. Wow. It’s actually spectacular. So take it right down to the buyer degree. If I stroll right into a KFC in Guangzhou, how is it completely different than KFC in Kentucky?
Wat: It’s somewhat completely different. To start with, for breakfast, now we have a really huge breakfast enterprise. Ninety p.c of the meals there’s from the oven, not from the fryer. For the traditional meal, 60% are from the oven, not from the fryer. And that is somewhat distinctive, as a result of not all of the QSR eating places and even KFC exterior China have ovens within the kitchen. We will have such combine, as a result of now we have the cooking gear.
Murray: So exterior of China, the gross sales are overwhelmingly fried meals?
Wat: Most likely. After which the menu selection is far greater in China. To provide you a way, a regional recipe, hen, which is big, it’s solely 6% of gross sales, and now we have a really huge beef burger enterprise. We’ve very huge whole-chicken enterprise. We’ve an enormous, you realize, rice enterprise, and the menu, it’s good meals. It doesn’t matter whether or not it’s American meals or Chinese language or Southeast Asian, it doesn’t matter.
Murray: Utterly completely different. How about Pizza Hut? Is it comparable?
Wat: It’s very completely different too. The largest promoting pizza in China is definitely durian pizza.
Murray: Durian?
Wat: Yeah. Yeah.
Murray: What’s durian?
Wat: Okay, There you go. It’s known as king of the fruit. It’s one thing that both you find it irresistible otherwise you hate it, it has somewhat sturdy perfume.
Murray: You realize it if you’re consuming it.
Wat: You for those who hate it, you’ll go off my restaurant however is doing extremely nicely. After which we’re additionally one which the most important steakhouses in China.
Murray: Yeah. Wow. And also you even have some native Chinese language manufacturers?
Wat: Sure Yeah. Little Sheep and Huang Ji Huang, which is the hotpot and the opposite one is steam pot.
Murray: Yeah. And are you making an attempt to construct extra of them?
Wat: Completely.
Murray: So over time, Yum China is turning into an increasing number of of a Chinese language firm.
Wat: Effectively, we’re an American firm, however we function in China, and the market continues to be so huge. To provide you a way—and with the pace of growth it’s exhausting to not deal with it—all over the world, globally, KFC has 29,000 eating places all over the world in 150 international locations. In China, subsequent month, December 15, we’re going to have a good time 10,000 shops. Ten thousand KFC shops alone in China. Multiple-third.
Murray: One-third of the overall.
Wat: Complete. Precisely. After which the opposite approach to take a look at it, KFC in India simply celebrated 1,000 shops, and KFC in Jap and Central Europe simply celebrated 1,000 KFC shops. And final month we have a good time 1,000 shops in Jiangsu province alone.
Murray: In a single province alone.
Wat: One province alone. In order that provide you with a way of scale, and the way a lot clients in China love KFC manufacturers.
[music starts]
Murray: I’m right here with Jason Girzadas, the CEO of Deloitte US, the sponsor of this podcast. Thanks for sponsoring and thanks for becoming a member of me, Jason.
Jason Girzadas: It’s a pleasure to be with you, Alan, and we’re privileged to sponsor this essential podcast.
Murray: Effectively, it’s nice to have you ever. This complete notion of generative A.I. is basically exploded onto the scene and into our consciousness within the final yr. It’s the quickest introduction of a brand new know-how in historical past. How do enterprise leaders take care of that, and the way do they separate the hype from the chance?
Girzadas: It’s an ideal query, Alan. The hype is actual, however we additionally assume the chance is extra actual, and actually, an crucial for all companies. The chance proper now for companies is round profiting from generative A.I. and different digital applied sciences for effectivity and productiveness positive factors with the idea they may proceed to evolve and mature, such that there are different alternatives for worth creation, and new disruptions and improvements that we haven’t even seen the probabilities of. The problem is simply to stability this chance. Consequently, companies need to diversify their approaches. It’s a CEO-level precedence, an understanding of the place and the way these fashions are being put to make use of in your enterprise operations. What are the controls put round information and information high quality? In addition to guaranteeing that the fashions are examined and truly validated such as you would do some other customer-facing or extremely delicate system in an enterprise atmosphere.
Murray: Jason, thanks on your perspective and thanks for sponsoring Management Subsequent.
Girzadas: Thanks.
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Murray: So let’s speak a bit of bit about you there. There are usually not that many ladies. I imply, it is a massive firm. Are you the biggest, by the way in which, the biggest restaurant enterprise in China?
Wat: One of many largest. Yeah, most likely the biggest, however certainly one of them.
Murray: And for those who’re not the biggest now, you’re going to get there both on the charge you’re going. How did this occur? There are only a few girls operating massive firms in China.
Wat: Effectively, there are tons.
Murray: Effectively, it’s single-digit proportion.
Wat: Yeah.
Murray: Yeah, yeah. How did you get into this place? Inform us the Joey Wat story.
Wat: I used to be born in China, however I moved to Hong Kong after I was 9. And I began to work, truly. That was the attribute of that point. After which I grew up in Hong Kong and I used to be in consulting after which I bought this chance to maneuver to the U.Okay. again to 2004 and I spent 10 years there, and that’s after I made the transition from consulting to operating enterprise, particularly turning round shops for retail enterprise. So I flip round…
Murray: Eating places.
Wat: Not eating places. I flip round two manufacturers there. One known as Savers, the opposite one Superdrug, which is the No. 2 well being and sweetness retailer within the U.Okay. After which again to 2014, I bought this chance to show round KFC in China. KFC was in a bit of little bit of bother, put it that approach, in China at the moment. I took the chance as a result of at the moment we already had 450,000 employees, just a few thousand eating places, and proper now, we solely have 4 30,000 employees for double the variety of the shops. The right way to get there—we are able to discuss it later. However for me, it labored, as a result of it is extremely thrilling model. And in addition, my son, at the moment, is at that age that I wished him to be taught Chinese language. Yeah. So we moved again to China, again to 2014 after which I flip round KFC, after which afterward, you realize, if you’re good at consuming, you eat extra, proper?
Murray: Supplying you with an increasing number of threat.
Wat: Yeah. By 2017, you realize, I used to be given the chance to show round Pizza Hut as nicely. After which by 2018, I bought the chance to be the CEO.
Murray: Was there a contest for CEO? The choice was made earlier than the spinoff, appropriate?
Wat: Right.
Murray: They got here to you and requested you to run the…
Wat: To run the KFC. After which at the moment as a CEO who ran your entire Yum China. However then afterward, they determined to provide me extra to eat.
Murray: Yeah. Wow. Fascinating. Effectively, you clearly have earned your place. Did you all the time wish to be a CEO?
Wat: I’d not say I all the time wish to be CEO. I’m all the time open minded about all the probabilities. That’s why I moved myself from Hong Kong to U.Okay. However again to 2004, I didn’t know what to anticipate. However I do know I really like retail. It sort of fits my persona fairly nicely, as a result of I’m very impatient. I like the main points, and I wish to really feel the purchasers—is one thing that as a retailer we function quite a bit on, our instincts, or on our understandings of the purchasers.
Murray: How do you try this? How do you come to with so many shops in so many locations and completely different manufacturers, various things, how do you come to have that intuitive really feel of your buyer? What do you do? Do you go to shops? Do you’re employed in shops? What’s your methodology for staying in contact with the client?
Wat: Keep in contact with buyer. Additionally, keep in contact with the employees. Each are extremely essential. If I had to decide on, I’d say keep in contact with the employees is much more essential.
Murray: Fascinating.
Wat: So I began to work after I was solely 9 in factories, after which afterward, after I was 15, I began to work in eating places in Hong Kong. And I suppose with all these years of working with the frontline employees, it all the time makes me very comfy to speak with my frontline employees. And the empathy I believe, is a very powerful factor for any retailer all over the world.
Murray: You realize, that’s an attention-grabbing—it’s attention-grabbing you say that, as a result of I hear individuals speak quite a bit today about empathy. However I believe 10 years in the past, I by no means heard CEOs actually use the phrase…
Wat: Actually?
Murray: Empathy. You’re feeling like that’s been essential to you personally?
Wat: Completely. As a result of truthfully for Yum China, we serve solely 2 billion clients a yr. Solely in China. There’s no approach that I can work together instantly with clients that always. How I get to know my buyer is thru my retailer managers? Yeah. And in our tradition, now we have one thing known as RGM, primary. Restaurant normal supervisor primary. They’re a very powerful group of people that the headquarter individuals we serve. And now I additionally discover ways to serve clients by way of my restaurant managers. Not the recipe from the client, as a result of this is able to be fairly exhausting to combination, however my good retailer managers, they all the time have an excellent sense about what the purchasers really need.
Murray: So if you’re hiring individuals, you’re hiring individuals for empathy.
Wat: That’s the primary. That’s primary. Primary, as a result of the explanations that now we have our retailer supervisor convention, enormous, 12,000 individuals in Macau. And I used to be very clear with our workforce that the second we misplaced the empathy for the frontline employees, that will be the second to not that decline of Yum China. For certain.
Murray: Wow. I wish to discuss know-how. You began a couple of minutes in the past to speak about how a a lot smaller variety of persons are operating, a bigger variety of shops. What are the primary technological breakthroughs that you simply’ve had lately, and the place does it go from right here?
Wat: It’s a extremely good query. I’m actually happy that you simply level out over the few years, as a result of it’s not one thing individuals can say, I made a decision to do it, it occurs this yr. It doesn’t work that approach. We’ve been engaged on it since 2014, -15, and we lastly get to the purpose that we are saying, okay, this section of digitization is kind of full, after which we have to begin the following milestone. The following milestone is A.I., however for your entire journey, 2015 until 2022 virtually. How did that occur? Effectively, I’ll discuss the end result, then we’ll discuss how. The result’s, we are able to put a variety of repetitive administrative work or duties within the retailer into one thing that may be accomplished by the A.I., or automation.
Murray: Are you able to give me one instance?
Wat: One instance. Fee. Over 90% of our cost proper now could be digital, and that’s $8 billion.
Murray: Wow. In?
Wat: That’s $8 billion in gross sales that’s accomplished by way of digital cost. So prior to now, I might need three individuals, 4 individuals, 5 individuals taking cash. Now I’ve one.
Murray: Wow.
Wat: Or lower than one, to be particular, as a result of individuals pay by way of digital. So that’s kind of factor that we’re speaking about, however that’s one instance. After which we transfer again to the restaurant operation, the best way to plan the manufacturing, when to get the hen prepared, when to prepare to attend for the client coming in. All this planning is completed by A.I. proper now. After which to maneuver my stock round from the provider to the logistics middle to the shop. It’s all accomplished by A.I. proper now, after which go all the way in which again to the mixing with the provider. So the automation, digitization, that course of takes a really very long time.
Murray: If you go to shops, different elements of the world, are you far are you approach forward of them on automation?
Wat: Most likely. However I is perhaps incorrect. I imply, there are lots of cool issues on the market that persons are doing. and what do I do know?
Murray: Do you—do you share concepts with—?
Wat: Completely. Had been very, very open about it. I imply, even through the pandemic, when our employees got here up with contactless supply, the very first thing we did, which we share with the remainder of the world as a result of it will likely be helpful. So now we have all the time been very open minded.
Murray: Do you’ve gotten individuals who run franchises in america, as an example, coming to China?
Wat: We’ve individuals in the identical trade or different trade who came visiting us and we’re fairly open-minded about it.
Murray: Yeah, I do know you’ve put sustainability in an important place.
Wat: Sure, certainly.
Murray: Are you able to clarify why and likewise whether or not that’s widespread in China?
Wat: Why? As a result of we’re very proud that, for 36 years, we’re all the time a part of the group. We’re there to serve the group. So it’s simply a part of the tradition. We deal with three areas—individuals, meals, atmosphere—as a result of sustainability may be very huge matter. Folks. Why? As a result of if we can’t maintain our enterprise going, we’re not going to be round to assist the atmosphere or something. Okay, So primary, sustainability is our jobs. Really. And we take excellent care of our individuals. For instance, in over 100 cities in China proper now, now we have meals bans. In over 40 cities in China proper now now we have one thing known as angel eating places, which is about shops by which greater than half of the staff have particular wants.
Murray: Actually?
Wat: Sure. It modified the dynamic. It’s attention-grabbing—when a retailer solely has a small variety of workers with particular wants, they’re the minority. When greater than half of the staff have particular wants, they turn into the mainstream. Then we, like my retailer managers and different individuals, need to be taught the signal language and different issues, and the shop atmosphere may be very quiet, very good, after which they really feel proud after which they help one another. After which relating to meals, now we have meals bans, and now we have, you realize, work on this marketing campaign known as One Yuan Donation. For 16 years now. And we raised the cash from the client. We solely ask for one yuan. Not more than that. Why? As a result of we wish kids to expertise donation. One yuan doesn’t harm in any respect. So a variety of youngsters truly spend a donation for the primary time in KFC after which we use the cash to, in the beginning, have most well-liked primarily milk and egg for kids in a distant space, and now the federal government takes excellent care of it. So we redirected the cash to constructed trendy and really extremely environment friendly kitchens for the faculties in distant space after which the atmosphere. In fact we’re coming to the 2050 carbon impartial goal, which is, you realize, on the way in which, and we simply simply have the primary logistics middle run utterly on renewable power in China.
Murray: In China. Wow. That’s very spectacular. So that you do these items, you deal with of workers with particular wants. You commit one yuan to charity. You’ve an environmentally sound practices, clear power. You do them as a result of they’re good for your enterprise.
Wat: They’re good for enterprise as simply the proper factor to do. And this another excuse you may name a egocentric cause or to not do it’s I believe, the group of people that profit most from all this initiative, now we have much more, by the way in which, from this initiative, truly, is our personal employees. We pay our employees with a aggressive pay, however we are going to make them wealthy in a single day. Nevertheless, we do consider that realization, the conclusion that giving is healthier than receiving, is the most important supply of unlocking wealth and happiness in life.
Murray: Wow. And unlocking wealth and happiness unlocks engaged clients. Completely comfortable workers. And that helps your enterprise.
Wat: Completely.
Murray: Yeah. Joey Wat. Fascinating dialog. Thanks a lot for being right here on the Fortune International Discussion board in Abu Dhabi. However thanks additionally for taking the time to speak with me. Thanks a lot.
Wat: Thanks.
Murray: Management Subsequent is edited by Nicole Vergalla.
Lev-Ram: Our government producer is Megan Arnold.
Murray: Our theme is by Jason Snell.
Lev-Ram: Management Subsequent is a manufacturing of Fortune Media.
Murray: Management Subsequent episodes are produced by Fortune’s editorial workforce. The views and opinions expressed by podcast audio system and friends are solely their very own and don’t mirror the opinions of Deloitte or its personnel. Nor does Deloitte advocate or endorse any people or entities featured on the episodes.
