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KFC's crisis in China tests ingenuity of man who built brand

Sam Su, vice chairman of Yum Brands, spoke in New York in December. Photo: The Wall Street Journal

Sam Su for years ran one of the highest-flying foreign business operations in China. These days, he's trying to pull it out of a tailspin.

As China head for Yum Brands Inc. for the past 16 years, Mr. Su built its KFC arm into the biggest foreign restaurant chain—and one of the most successful foreign brands—in the world's most populous market. Yum has more than 6,000 restaurants in China, including Pizza Huts and other, smaller brands—about three times as many as rival McDonald's Corp.

Mr. Su's efforts helped make China Yum's biggest source of profit, and earned him promotion to company vice chairman.

That achievement is under threat from a persistent public backlash over the reported use of growth hormones and antibiotics by two KFC chicken suppliers. The backlash is expected to push Yum's China annual same-store sales down for the first time at least since Yum started breaking out China in financial reports in 2005.

Yum is scheduled to report full-year numbers Monday, but same-store sales in China through November fell 16%.

More than a year into the crisis, Yum is still struggling. Now Mr. Su and Chief Executive David Novak say the Louisville, Ky., company can turn things around in 2014, vowing that new menu items and digital-media initiatives will revive the brand in China. "I fully expect a strong comeback year," Mr. Su said in a rare interview last month.

Some investors are getting restless. Yum's shares—which had been propelled for years by its China growth—are up only 12% since late November 2012, when Chinese state media started reporting on food-safety concerns surrounding KFC suppliers. The Dow Jones Industrial Average rose 26% in that period.

"If things don't turn around, he'll be gone," said John Kornitzer, CEO of Kornitzer Capital Management Inc., which now holds more than 27,000 Yum shares, down from more than 92,000 a year ago. "I'd give him a year or two."

Yum's woes began with a Chinese media report in November 2012 alleging that a KFC supplier had been using growth hormones and antibiotics to help chickens grow faster. The claims, which quickly spread online, tapped into widespread consumer fright in China over food safety.

Government officials investigated, and recommended Yum strengthen its poultry-supply-chain practices, which Yum says it has done.

On top of the fears was a sense among some Chinese consumers that Yum had lost its allure. Yum executives acknowledge that they did too little in recent years to jazz up KFC's China menus, and that they misjudged how stubborn the food-safety concerns would be.

Mr. Su says an avian-flu outbreak last spring prolonged the sales slump.

"For several months, a lot of people stopped eating chicken and a lot of places stopped serving chicken. We were one of the few restaurants that still had chicken on the menu," Mr. Su said of the avian-flu outbreak. "That's one of the reasons we hadn't seen as quick a recovery as we would have liked."

The crisis is testing the ingenuity and determination that current and former colleagues say helped make the 61-year-old Taiwan native a success since he joined Yum as a regional marketing director in 1989, when the chain operated four KFCs in China.

Don Mulligan, chief financial officer at General Mills Inc., noticed that Mr. Su was willing to challenge convention when the two worked together in the 1990s. At one point Mr. Su called the treasurer of PepsiCo Inc., then Yum's parent company, to question a calculation Pepsi had made about risk in China that would have limited Yum's ability to expand there.

"He won the day," recalls Mr. Mulligan, who worked then in Pepsi's finance team in Hong Kong. "It was very impressive. At the time he was much more junior in the Pepsi hierarchy."

In 1997, the year Pepsi spun off Yum, Mr. Su was made the restaurant company's China president. To expand KFC, he enticed China's burgeoning middle class by pairing relatively inexpensive American-style chicken with Chinese additions to the menu like rice and soy milk.

For restaurant managers, Mr. Su—who earned an M.B.A. from the University of Pennsylvania's Wharton School—hired only college graduates. He required them to undergo four years of on-the-job training in a program Yum refers to as Whampoa Academy, named for the famed Chinese military academy.

He rewarded successful employees with an annual "clock builder award," inspired by the management book "Built to Last," about companies that succeed beyond the tenure of any single leader or product. Mr. Su gave winners a Rolex watch.

When employees came up short, he let them know. Around five years ago, Mr. Su saw that Chinese consumers were losing interest in Pizza Hut. "What do Chinese diners really want?" he asked his marketing team at a strategy meeting. When some employees gave answers he deemed insufficiently thorough, Mr. Su reacted angrily, raising his voice and demanding immediate answers, recalled a person who worked with Mr. Su at the time.

He made the team develop dishes that would include everything from pasta to rice in order to please an entire Chinese family, and demanded that the food-innovation team refresh at least half the menu every year, this person said.

The Pizza Hut business has since rebounded in China, posting 5% same-store sales growth in the third quarter of last year.

Mr. Su's promotion to vice chairman in 2008 made him Yum's No. 2 leader—an unusual status for a regional chief in a major multinational. Still, he and his wife, president of Gucci's China business, keep a low profile in China. He likes to play golf-often with Mr. Novak—but says he spends most of his time working. He acknowledges that his style can seem harsh. "I'm very serious—a business first, brand first kind of person. Sometimes I'm not as sensitive," Mr. Su said.

The current struggle is more vexing than previous stumbles. SARS in 2003 and an avian flu outbreak the following year hurt KFC sales. In 2005, KFC pulled several items from its menus after discovering that some of its chicken seasoning contained a carcinogenic dye.

Each time, Yum rebounded quickly and kept growing, eventually reaching nearly 1,000 Chinese cities. China sales rose 24% to $6.9 billion in 2012, and Mr. Su was Yum's highest compensated executive that year. He received a total of $16.6 million in 2012, compared with $14.2 million for Mr. Novak, the CEO.

Messrs. Su and Novak have given scant detail about their plans this year to revive KFC's China sales and modernize the brand. The company has already started some measures, such as an advertising and social-media blitz labeled "I commit" in which employees and suppliers proclaim that KFC is safe.

"The pressure we put on ourselves exceeds anything we could ever get from any shareholder," says Mr. Novak. "But we do have a mind-set in this company that you have to earn the right to keep your job, and that starts with me and with Sam."

"How 2014 will unfold, I don't know," says Mr. Su. "What I do know is we've done a lot of work."

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