Pizza plays second fiddle to chicken in China, but Pizza Hut is trying to change things

China loves fried chicken, and KFC is proof of that. The fast food chain is the the largest restaurant operator in the country, with 5,800 locations and counting as of September 2018. However, not all Western-style dishes receive the same love. Pizza Hut may be the largest casual dining establishment in the world’s most populous country, but the pizza chain doesn’t resonate with younger generations of Chinese consumers in the same way it once did.

This caused problems for yum china ( YUMC -2.34% )the exclusive franchisee of the two concepts of the former parent company Yum! Brands ( YUM -3.51% ). Yum China is getting some leeway with the menus and the way it markets Pizza Hut, and it’s working harder to appeal to young people in its stores.

Not your dad’s Pizza Hut

Pizza Hut has long been marketed as a premium dining experience in China. That makes sense, because the ingredients that go into the Western favorite are more expensive in Asian markets, which doesn’t exactly lend the cuisine to the fast-food-dominated scene we’re used to in the United States.

Image source: Getty Images.

The chain, however, has had a difficult time. It’s not that the pizza itself came out. There’s a lot of interest in the dish, as evidenced by stiff competition at pizzerias (most of them marketed as an upscale experience) across the country. Over the years, Pizza Hut’s menu seems to have lost its appeal. In the first three quarters of 2018, Pizza Hut’s same-store sales — a combination of foot traffic and average customer ticket size — fell 5% in China.

This is not a new problem. More than a year ago, 2017 Yum China Investor Day, new CEO Joey Wat recounted how a young Chinese customer described Pizza Hut as a “reliable backup boyfriend” — a tongue-in-cheek way of saying it’s just an OK option. Efforts to inject new energy into the brand began last fall, but with a negative traffic trend, Yum China is now ready to do more.

A battle for the Chinese middle class is underway

To connect with Chinese millennials (people in their 30s and below), Pizza Hut locations in China are getting a refreshed logo, new trendy store designs and furnishings, and employee uniforms from the fashion designer New Yorker Anna Sui. The new layout of the restaurant, which will be gradually launched in more than 2,200 locations in China, includes an open kitchen, a bar, an indoor garden and family dens.

Two Pizza Hut employees wearing Anna Sui's new evening dress.  Both wear dark black suits with purple accents.

The new Pizza Hut uniforms in China by Anna Sui. Image source: Yum China.

While renaming the image is important, it’s more than just a facelift. The menu is also simplified and revamped with new items, which will first be tested in a pilot store in Nanjing City. The company will also launch a smaller-format store to make take-out and delivery more convenient as demand grows with China’s emerging middle class. Wat says Pizza Hut hopes to create a new image – one that’s hip, suitable for young families and good value for money.

Wat and Yum China’s management team stressed that Pizza Hut’s turnaround will take time. Menu changes alone have yet to yield results, and the remodeling of more than 2,200 stores won’t happen overnight. The improvement in Pizza Hut’s results is significant, however, as the 20% of Yum China’s sales from the pizza chain bogged down overall results, and other American brands continue to settle in the territory of the chain.

A better Pizza Hut could mean more growth as China’s consumer base is expanding and growing rapidly. Yum China sees having more than double the current number of stores – up to 20,000 restaurants — in just over a decade. Fried chicken will be key to getting there, but having a viable second option to look into will help. Pizza Hut is currently playing second fiddle to fried chicken, but Yum China has shown itself to be more than capable of growing KFC. Pizza Hut could be next.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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