1 Billion Armpit Theory Marches On

China traders used to refer to the “one billion armpit theory” as the belief by western companies that if they could just sell deodorant to the Chinese, their sheer numbers would insure success.

Nearly 30 years after my first trip to China, the successes and spectacular failures of western companies in the Middle Kingdom are the subject of B-school models and dissertations. However, QSRs have been one of the success stories, with Yum! Brands and their KFC outlets an early pioneer. Now the company’s China division is flexing its muscles by acquiring properties with local appeal and strength, highlighted by their 20% stake in Little Sheep Group Limited, headquartered in Inner Mongolia (sale price $63MM).

The 375-restaurant chain sells "Hot Pot," a complete meal of dumplings, noodles, lamb and vegetables originating in northern China, but now popular across the country, as well as in Hong Kong, Japan, Canada, and even parts of the U.S. Sam Su, President, Yum! Restaurants China and Vice Chairman, Yum! Brands, Inc. insists China is the “biggest growth opportunity in the restaurant industry in the 21st Century.” Yum! also is pushing its East Dawning and Pizza Hut Home Service brands, and currently has 3,000 restaurants with a new one opening every day. The company claims a compounded annual growth rate of 29% and a 31% operating profit. Yum! China Division is the highest margin and highest return division in the company’s global operation.

In the past, the overseas branches of most US companies were afterthoughts. Could we be looking at Yum!'s next CEO?

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