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The Yum! Restaurants group is made

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					BUSINESS MANAGEMENT

AWARENESS
BUSINESS MANAGEMENT TALKS TO YUM! RESTAURANTS INTERNATIONAL’S STEVE VARSANO ABOUT THE ROLE OF FRANCHISING IN SUCCESSFULLY BUILDING A BRAND PRESENCE IN CENTRAL AND EASTERN EUROPE.

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he Yum! Restaurants group is made up of about 34,000 restaurants, approximately 20 percent of which are ‘company-owned’ stores with the remaining 80 percent run as franchises. The company’s global brands include Kentucky Fried Chicken, Pizza Hut, Taco Bell, A&W Restaurants and Long John Silver’s. Yum!’s main focus internationally is to grow the Pizza Hut and KFC brands by increasing the number of stores at a rate of over 1000 new stores a year. Steve Varsano is Senior Director of New Business Development for Yum! Restaurants International, and has a primary focus on the markets of Western, Central and Eastern Europe, as well as those in the former Soviet states. BM. What are the benefits of franchising? Do you think this is a good way for European entrepreneurs to start a business? SV. There are two ways to look at this: through the eyes of the franchisee and the eyes of the franchisor. If we look at it from the franchisee’s perspective, it absolutely makes sense as a way to start a business – if only for the head start it gives you in terms of brand awareness. Obviously that’s the most expensive item on a profit and loss (P&L) sheet to develop, and if you can start off with a global brand that people will recognise – even in a country it has never existed in before – that’s a definite advantage. In most countries around the world, if you were to ask people about KFC and Pizza Hut, they would know the brands. They might not know the entire product line, but they would recognise the logos and what they represent. Being able to tap into the power of a global brand obviously provides powerful assistance for the franchisee. The second advantage is being able to implement a system that is proven to work better in a number of international markets. Whilst this doesn’t necessarily guarantee success, these proven methods of operation, product sourcing, marketing and training really do give the franchisee a much better chance of success in a new market. In addition, our franchisees have access to global input, new product development and marketing ideas, so they are not out there on their own – they are part of a global family. The benefits to the franchisor are twofold. First, they can grow their brand at a much faster pace with a lot less capital investment. The second advantage is that there is nothing better than having local expertise assisting you to grow your brand. This has certainly been key to our success in developing certain international markets. It really is a win-win situation for both parties. BM. What is involved in setting up a franchise? SV. Franchisees invest their money to design, construct and supply their restaurant. We then offer assistance in helping them design it – selecting a site, assisting them as to how it should be laid out and what equipment should be specified; we also assist them in sourcing products and we approve suppliers. Initially, we assist them in training their supervisory staff.

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BM. What tips would you give to anyone interested in setting up a franchise in the region? Are there any lessons that can be learned from previous success stories and/or failures? SV. There are no magic answers, but obviously, location is one of the most important. You cannot pick a location that is so economically unviable that it makes the restaurant’s P&L impossible to work; you also cannot afford to get too emotionally attached to a particular location – it may be an incredible site, but if you cannot afford the rent then you will fail. Of course, there is sometimes the case where the operator is also using the location as an advertising ‘billboard’ for the brand. In this case, the economics of this specific investment may have to be amortised over a number of locations that will benefit from this investment. A viable P&L is essential. The three critical pieces of your P&L are cost of food, cost of labour and cost of rent, but these inputs fluctuate considerably across different regions. For example, you can have an extremely high real estate percentage on your P&L in Moscow, compared with a much lower percentage in Central and Eastern European countries. Similarly, high labour costs form a high percentage of the P&L in Western Europe, whereas in CEE these costs are much

lower. Generally speaking, CEE countries have a better P&L ratio because the labour costs are usually much lower. When we look at new partners in any market, financial viability is very important Having the necessary funds to adequately grow the business is a key requirement. However, the most important factor is that franchisees must have the right operational expertise in the restaurant/retail business.

BM. What is the importance of brand recognition in the region? And what kind of presence do your brands command in Central and Eastern Europe? SV. At the moment, our brand penetration in CEE is not as large as we would like to see it – but this is why we are focusing on the region. With most of these countries now joining the European Union, a lot more international tourism and business is taking

“With most of these countries now joining the European Union, a lot more international tourism and business is taking place within Central and Eastern Europe. As this increases, brand recognition becomes much more important”
When we profile a franchisee, we are looking for someone with a strong entrepreneurial spirit who is forward thinking and development-minded; on the flipside of this, you also need someone who can recognise and accept that our way of operating has proven to be very successful all over the world. It’s a fine line, finding someone who is willing to accept our way of doing things but who also has the entrepreneurial spirit to move things forward. place within Central and Eastern Europe. As this increases, brand recognition becomes much more important. For instance, travellers from outside the region quite often want a ‘comfort factor’ when visiting a new place. When they see a particular restaurant sign that they recognise on a street, they know exactly what to expect once they get inside. It represents something familiar and comforting in a foreign environment. BM. Obviously your brands have been phenomenally successful in the US and in Western Europe. What particular challenges does operating in CEE offer, and how are these different from other parts of the world? SV. Firstly, as I’ve just mentioned, building brand awareness is the single biggest challenge in any market. You also need to understand what is important within that market – you need to focus on which delivery methods are going to be most successful within a particular country. For instance, KFC is a fast food concept whereas Pizza Hut is a casual dining restaurant – they’re two completely different models of doing business within the restaurant industry. You can further divide them down into detailed subsections. For example, while Pizza Hut is a casual dining restaurant, it also has a

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BM. What is multi-branding, and what are its advantages? SV. Multi-branding is basically taking two of our brands and putting them under one roof. This has proved to increase sales dramatically in the US. It expands your menu and variety, and it reduces what we call the ‘veto vote’ – having people not go to a restaurant because of limited choice in menu items. At the moment, we’ve just opened our first multi-brand restaurants in Europe (Germany and the UK). Once we have a feel for any changes we need to incorporate to be further successful in these European markets, we will then look at other countries we want to expand in. However, in terms of conquering markets such as CEE, the co-branded model may have to wait a little longer so that brand awareness is sufficiently built in at least one of the brands. In addition, we want to perfect the co-branding model as much as possible in our company restaurants before we let the franchisees start on it. BM. What do you think the future holds for Yum! in the Central and Eastern European region? SV. We think that the future holds a lot of positive prospects, and we’re looking to increase brand penetration pretty dramatically. There is enormous market share we have yet to attack. Chicken consumption in Europe has risen considerably in the last 10 years whilst beef consumption has fallen, so we think that KFC has a huge future in the region. We also see the pizza market as growing in popularity across the region, and think that our various offerings – sit-down, take-out and delivery, in addition to the great quality products and value we offer– will prove a success in the Central European markets. There is so much growth potential in these two brands that we’re concentrating all our efforts on KFC and Pizza Hut for now. We are also entertaining numerous enquiries from operators of other local and international brands who want to convert their locations to these brands now, before we start penetrating the market and taking their market share away. Obviously, this is sometimes the best opportunity for both parties if the match makes sense. s

delivery/take-away side of the business that can be run inside a full restaurant (in what we call a restaurant-based delivery unit) or independently as a totally separate entity. KFC can similarly be looked at differently depending on its drive-through business, its city centre business and its food court business. The key thing is understanding which business models will be accepted within the local market – you need to know what the mentality of the local market is in terms of its eating habits before you commit to a particular business model. BM. In which countries do you anticipate having the greatest success? SV. Poland and the Czech Republic are

the places where we have the greatest penetration today in Central and Eastern Europe, in terms of both Pizza Hut and KFC. Other places we will be focusing our efforts include Russia, Ukraine, Austria, Hungary, Serbia, Croatia, Switzerland, Denmark and Sweden. We have found that certain parts of the P&L work better in these countries, and that the competition has been reasonably successful in the region. They have markets in which we think the chicken consumption is high enough (and still increasing) to make KFC a success, and pizza consumption is pretty much acceptable in most countries – people are looking for that branded quality product that Pizza Hut offers.

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