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WIKI ANALYSIS
Yum! Brands Inc. (NYSE: YUM) is the world's largest fast food company with 35,000 restaurants in over 110 countries. Yum restaurants include KFC, Pizza Hut, Taco Bell, Long John Silvers (LJS), A&W, Pasta Bravo, Wing Street, and East Dawning. KFC, Pizza Hut, Taco Bell, and LJS are the world leaders in their respective categories. There are three operating regions as well: the US, China, and International. Yum is part of the Quick Service Restaurant (QSR) industry primarily competing with McDonald's (MCD), Domino's Pizza (DPZ), and Burger King Holdings (BKC).
As a competitor in the QSR industry, Yum must deal with commodity prices, health concerns, and intense competition. The main inputs for Yum are chicken, beef/pork, cheese, flour, produce, paper, and beverages. If commodity prices rise, intense competition makes it difficult to counter by setting higher prices. Health and obesity concerns are a constant factor in this industry. In response to these concerns, KFC is eliminating trans fat and Taco Bell is allowing customization of menu items.[1]
Yum has experienced tremendous growth overseas. Yum made China its own division in 2005 due to its overwhelming success and rapid expansion. Yum is now the dominant QSR company in mainland China with over two times as many restaurants as McDonalds. While the international and China divisions both achieved about 25% operating profit growth in 2006, the US division has struggled. Taco Bell's E. coli outbreak in 2006 and rat infestation in early 2007 added to US difficulties as company-operated Taco Bell same-stores sales dropped 11%. In 2006, same-store sales dropped 3% system wide (company owned and franchisees) in the US. Yum plans to make a turnaround in the US with continued re-franchising, introducing new products, and improving the overall quality of its restaurants. Given that the US still represents over 59% of Yum's revenues, a turn around in US markets has to be a priority.
Restaurants
KFC
In the US, KFC has a 46% market share in the chicken QSR segment, close to four times higher than the next competitor. KFC operates in over 100 countries with a total of 14,248 restaurants worldwide. KFC accounts for 86% of Yum's presence in China with 2,250 units. KFC is the leading quick service restaurant brand in China. East Dawning is a new fast food Chinese concept that is being presented in China as well.
Pizza Hut
Pizza Hut claims the leading position in the US pizza QSR segment with a 15% market share. Pizza Hut operates in 92 countries with a total of 12,685 restaurants worldwide. There are 360 Pizza Huts in China and it is the leading casual dining brand in China. Wing Street and Pasta Bravo are two restaurant concepts that are many times paired with Pizza Hut. Wing Street or Wing Works (usually paired with KFC) features flavored chicken wings. Pasta Bravo adds a made to order pasta segment to Pizza Hut.
Taco Bell
Taco Bell claims the leading position in the US Mexican QSR segment with a 58% market share. Taco Bell operates in 14 countries with a total of 5,846 restaurants worldwide.
Long John Silvers
LJS claims the leading position in the US seafood QSR segment with a 32% market share. LJS operates in 6 countries with a total of 1,156 restaurants worldwide. Yum's multi-branding strategy often pairs LJS and A&W. A&W operates in 11 countries with 644 restaurants worldwide. A&W serves hot dogs, hamburgers, and its A&W root beer. It is the oldest fast food franchise in the US.
Trends and Forces
Emerging Markets
YUM's KFC and Pizza Hut brands span over 110 countries worldwide; in 2007 60% of the companies operating profit was generated overseas. This high international exposure is offsetting a slowdown in YUM's North American market as U.S. consumers pare back discretionary spending. YUM's the top-25 markets for KFC, Pizza Hut, Taco Bell, A&W and Long John Silver's are present in several highly coveted markets where the middle class and disposable income are growing, including high-growth markets like Mexico, South Africa, Poland and Egypt alongside a sizable presence in Asia. Yum is also well established in the developed economies of Canada, Western Europe, Japan and Australasia. Although the company faces the challenge of expanding beyond the traditional KFC and Pizza Hut brands in these markets, the company is well positioned to benefit from strong global economy and a rising, global middle class.
China
Yum's China division has produced the company's greatest growth and profitability over the last few years. In 2006, operating profit grew 26% (31% if you include exchange rate benefits) and same-store sales growth was 9% in mainland China. Yum operates 2,610 units in China and plans to open 400 more units in 2007. In China, KFC's growth is outpacing rival McDonalds at a rate of 3 to 1. Unlike its competitors, Yum owns its own distribution centers. Yum's 16 distribution centers allow the company to grow more efficiently as its serves to its restaurants in 402 different Chinese cities.
A major part of KFC's success in China has been Yum's approach. Compared to KFC in the US, KFC China has a more diverse menu, focuses on health by meeting with health councils in China, and involves itself in the community by sponsoring 3 on 3 basketball tournaments and creating dance programs at high schools. Yum strives to become deeply rooted in the society and trusted by the Chinese consumer. China's growth potential is still substantially untapped as Yum believes that it could have close to 20,000 restaurants in China in the future. Although, as Yum's presence in China expands and occupies the smaller cities and towns, the risk for Yum's continued success also increases. China made up about 17% of Yum’s revenues in 2006 also making Yum vulnerable to changes in the Chinese economy or a change in consumer preferences. In the most recent quarter, Yum's China operations continued to drive profit and revenue growth, reporting 26% system sales growth and operating profit growth of 29%.
US Turnaround
Yum's US division accounts for 50% of total profits, but unfortunately for Yum, the US has not seen the same growth success as the overseas divisions. While there is still a lot of growth potential in China and the International division is expanding into continental Europe, Russia, and India, the US division operates in a saturated market. There are over 18,000 Yum restaurants in the US which as a population of about 300MM, whereas China has over only 2,000 restaurants and a population of 1.3 billion. The US faced a 3% same-store sales decrease system wide (company owned and franchisees) in 2006.
Taco Bell has been Yum's best performer in the US. About 55% of the US profits come from Taco Bell and has had positive same-store sales growth from 2001 to 2005. Health scares from E. coli and rat infestation changed Taco Bell's positive growth pattern into a 11% same store sales decline in 2006. In order to make a rebound, Taco Bell is planning a 1.5% new unit growth and is introducing a breakfast menu in 2007. Depending on the success of Taco Bell's breakfast menu, a breakfast menu for KFC may also be introduced in 2008.
Product and branding innovation in Taco Bell, KFC, and Pizza Hut will also play an important role. Taco Bell introduces between 40-50 new products or line extensions every year, and KFC has six new products lined up for 2007. KFC is also marketing lower priced products like the 99 cent Snacker to build a more value friendly image. Yum's US multi-branding strategy calls for the occasional combination of a Pizza Hut and Pasta Bravo, KFC and Wing Works, and LJS and A&W, among others. This strategy increases unit sales and makes more expensive locations plausible for Yum to occupy. Yum is dependent on the success of its US division and its turnaround strategies aims at increasing the growth and profitability of this important division.
Franchising
Yum has been working to increase the franchising of its restaurants, especially in the US. Since 1997 when Yum split from PepsiCo, Yum has decreased company owned restaurants by 12% bringing the current percentage to 22%. While re-franchising tends to decrease sales growth, it increases profitability. Yum's "Earn the Right to Own" initiative hopes to re-franchise 1,500 restaurants. So far 557 US restaurants have been re-franchised and Yum has averaged about $413,000 in sales proceeds per unit. Re-franchising has also positively impacted operating margins in the US and Yum plans to use re-franchising as part of their turnaround strategy for the US division.
Commodity Prices
Yum's greatest inputs are chicken, beef/pork, cheese, flour, produce, paper and beverages. In 2006, commodity costs amounted to about $2.5 billion and were about $45 million less than 2005. Still, disease and health concerns such as the avian flu have increased chicken prices and could affect the availability of chicken in some places. The avian flue affects KFC in particular due to its chicken based menu. When commodity prices do increase, Yum has a difficult time covering the increased costs by charging higher prices, due to the competitive environment in which it operates.
Health Issues
The QSR industry faces health concerns in terms of both obesity and cleanliness. Yum faces obesity concerns from many consumers. KFC was involved in a lawsuit in 2005 surrounding trans fat. In response to these concerns, KFC plans on eliminating trans fat from its food by the end of 2007 and Taco Bell is allowing customization of its menu items giving the consumer the option to choose a healthier meal.
In 2006, Taco Bell had an E. coli outbreak resulting in $20MM in lost revenues. In 2007, a New York City Taco Bell had to close due to rat infestation. Both of these have contributed to the decreased profitability of Taco Bell and the US division as a whole over the last couple years. The first avian flu outbreak in Asia caused sales to drop between 20% and 60% at many Asian KFCs. It is reported that avian flu is not a danger if the chicken is cooked, but the sharp decline in sales displays the impact a possible risk could have. Following these incidents, and the red dye scare in China, Yum implemented more safety measures to counter these risks. In China, Yum has developed a traceability system to quickly recall any infected food. In addition, Yum audits, randomly and twice annually, its suppliers to ensure they are maintaining safety standards.
Competition
The QSR segment is a crowded and intense environment. Yum's diverse portfolio of restaurants attracts competition from many different types of quick service restaurants. McDonald's (MCD) is Yum's largest global competitor. MCD is the leader in the US QSR segment and is growing in China. KFC is the dominant player in the chicken QSR segment with its closest competitor as Popeye's. Although, increased chicken choices at burger joints like McDonalds, Burger King, and Wendy's are also grabbing sales from KFC. Pizza Hut has received significant competition from Domino's Pizza (DPZ) and Papa John's over the last few years and they have been keeping Pizza Hut's sale growth down.
From a market perspective Yum faces its fiercest competition in the US. This is due in large part to the fact that US market is extremely saturated with QSRs. Overseas, Yum has a very strong position and plans to expand its already very successful International division into continental Europe, Russia, and India.
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