Actively Expanding Restaurant Group：Yum
1. PROFILE
Yum is a Kentucky-based restaurant group, which owns three major chain restaurants, KFC, Pizza Hut and Taco Bell. It has more than 48,000 restaurants in over 145 countries and regions, expending at an average rate of 8 restaurants a day. Now it is the biggest restaurant company and also listed in Fortune Global magazine as one of the top 500 companies in the world. In 2018, Yum was selected as a Dow Jones Sustainability North America Index. Yum was listed on the NYSE, ticker is YUM, and is one of the constituents of the S&P 500.
2. COMPANY INTRODUCTION
In 1997, the beverage giant Pepsico acquired three brands, KFC, Pizza Hut and Taco Bell, in order to enter the restaurant industry. Then these brands were split from Pepsi and became an independent listed company, Yum. The brand expands its business landscape in a franchise manner all over world.
In 2016, Yum! Group China Division was separated from the group and operated independently. Yum! China was established and listed on the NYSE under the code YUMC. YUMC has exclusive operation and authorization rights for KFC, Pizza Hut and Taco Bell in China, and has a chain restaurant of 東方既白 (Chinese Restaurant) and 小肥羊 (Lamb).
Brands
-KFC
The world’s second-largest restaurant chain, second only to McDonald’s. KFC was originally a fast-food chain specializing in fried chicken. In recent years, in response to consumer demands, KFC’s products have gradually turned into health-oriented. It currently has more than 23,000 restaurants in over 135 countries.
-Pizza Hut
It is the world’s leading pizza chain restaurant in terms of revenue and number of restaurants, and currently has more than 18,000 restaurants in over 100 countries.
-Taco Bell
The world’s largest Mexican chain restaurant, currently has more than 7,000 restaurants.
Operating Model
The three brands of Yum! Group, most of the restaurants around the world operate in a franchise manner.
Franchising means the headquarters distributes the brand’s trademarks and business knowledge to individual stores, and stores are guided by the headquarters. The benefit to the individual operators is to reduce the time for learning and exploration, but they need to pay the franchise fee to the headquarters.
For enterprises, unlike the direct chain, company doesn’t have to invest in higher capital, and to worry about the personnel, financial and other details of individual store. The income of the company is collected from the store in the form of special demand fees. It can be said that the faster the exhibition store and the more the number of stores, the faster the company’s revenue will grow.
Menus
Just like most multinational restaurant companies, Yum Brands also design menus for different customs and cultures in different countries. For example, KFC launches different meals in various countries, such as curry-flavored burgers in India, old Chinese Beijing chicken rolls, and Japanese schnitzel burgers, which highlight local characteristics and are accepted by the local market.
3. FINANCIAL PERFORMANCE
From the above chart, we can see the revenue share of each brands, in which the proportion of KFC has declined, and the decline has shifted to Taco Bell. It may be due to the recent launch of many competitive meal combos. The combination of packages and high consumer acceptance has spurred an increase in revenue.
From the above chart, the total number of restaurants has shown steady growth. At present, it is close to the 50,000 restaurants. It is worth noting that the proportion of franchise business has reached nearly 100% from around 80% before 2016. Almost all restaurants are franchised, and this business model allows Yum to maintain a certain exhibition speed and increase market visibility and market share.
From the above chart, although the operating profit and net income of Yum are not rising steadily with some fluctuations, the net income is still maintained at a level above US$1 billion each year. Under the catalysis of cooperation with other parties and the promotion of delivery services, the company’s growth can be expected.
2Q19 Performance & Highlights
-Performance
System Sales：US$12,473M, 10% YoY：Benefit from the strong performance of KFC and Taco Bell
Same-Store Sales growth：5% YoY(KFC 6%, PH 2%, TB 7%)
Number of Restaurants growth：7% YoY(KFC 6%, PH 10%, TB 3%)：The growth in the number of restaurants is mainly due to two factors：
(1) 312 new stores was opened this quarter
(2) Strategic alliance between Pizza Hut and Telepizza(owned more than 1,600 restaurants in over 20 countries)
Operating Profit growth：5% YoY(KFC 11%, PH 18%, TB 7%)
Effect of Exchange Rate on Cash：US$ 1,700M
1. KFC
Number of restaurants grow from 21,838(2018) to 23,118(2Q19)：331 restaurants opened in 54 countries in this quarter
Same-store sales increased for 16 consecutive quarters, with Japan (18%) and Africa growing by double digits
Gross margin growth from 36%(2018) to 45%(2Q19)
2. Pizza Hut
Number of restaurants grow from 16,823(2018) to 18,515(2Q19)：221 restaurants opened in 42 countries in this quarter
Gross margin grow from 35%(2018) to 39%(2Q19)
3. Taco Bell
Number of restaurants grow from 6,905(2018) to 7,135(2Q19)：55 restaurants opened in 12 countries in this quarter
Same-store sales remain growth for 12 consecutive quarters
Memberships over 1,100M
Gross margin grow from 31%(2018) to 33%(2Q19)
-Outlook
2019 full year EPS Target：US$ 3.75
4. Prospect
Competition
Following will compare KFC and Pizza Hut with McDonald’s and Domino’s：
KFC VS. MCD
From the above table, we can see that McDonald’s is the world’s largest fast food chain, with a market cap of nearly 5 times that of Yum. Moreover, McDonald’s sales is nearly 4 times that of KFC (exclude China sales) as well as the operating profit is 9 times that of KFC. According to above statistics McDonald’s scale is obviously much larger than KFC.
As can be seen from the above chart, the sales of the two fast-food faucets are growing at a steady rate. The two develop with their own characteristics. KFC focuses on high-quality fried chicken and a healthy eating style. McDonald’s is constantly launching new products. The launch of distinctive new products has attracted customers, and both parties have a day in the fast food market.
Although it seems hard for KFC to exceed McDonald’s in revenue and scale in the short term, the trend of modern people’s health-oriented diet is becoming more prevalent, which give KFC an opportunity to gain more market share by focusing on healthy menus.
Pizza Hut VS. Domino’s
In the pizza chain, Pizza Hut is the world’s largest one. However, Domino has gradually caught up with Pizza Hut in recent years, which shows Domino’s ambition to challenge the leader.
From the above chart, we can see there is a considerable gap between the sales growth rate of the two. The sales growth of Pizza Hut has been moderated. On the other hand, Domino’s has maintained double-digit growth for several consecutive years and surpassed Pizza Hut in 2018.
In the face of the strong challenge of Domino’s, Pizza Hut also responded in 2018, announced a strategic alliance with the Spanish pizza chain Telepizza to improve the current weak growth momentum.
Development Strategy
-GrubHub：
In 2018, Yum acquired GrubHub’s common stock of 200 million US dollars, accounting for 3% of the shares, and obtained a seat on the board. GrubHub is the largest delivery service company in the United States, showing that Yum is active in capture business opportunities. The president of Yum said half of the 48,000 restaurants of Yum may offer delivery service.
From the above chart, we can see the number of active users of GrubHub has grown 10 times from 2012 to 2Q19, reaching 20 million. While the US population is more than 300 million people, GrubHub’s active users only accounting for less than 7%, which means there is a considerable room for growth.
Not only in the United States, Yum can also work with local delivery companies in other countries, such as China’s US Mission, Taiwan’s food panda, Britain’s Deliveroo, etc., which will allow Yum! to reach more customers to increase revenue.
-Telepizza：
Yum signed an agreement with Telepizza in 2018 to form an alliance with it. As such, Pizza Hut may has a chance to increase market share in Spain, Portugal, Switzerland and Latin America. Telepizza currently has more than 1,400 stores worldwide, and the agreement states that Telepizza will open 250 stores in three years and 1,300 new stores in 10 years.
Digital Transformation Accelerates Growth
One of the important part of the restaurant industry is delivery. From the previous cooperation with GrubHub, we can see the purpose of Yum. Although these brands mostly have their own delivery services, consumers need to reach a certain amount to be free to send, or have to pay higher delivery costs, which may reduce consumers’ willingness to purchase a meal.
However, in the era of digital transformation with more and more advanced technology, many professional delivery companies have also greatly changed the way people consume. The restaurant industry also cooperates with these delivery companies to develop their own strengths, so that consumers can use the cheaper price to get delivery meals.
In the future, the revenue proportion of food delivery will gradually increase. As mentioned earlier, users on GrubHub in the United States are only 7% of the total population, indicate a considerable room for growth. In Europe and Asia (except China, China’s delivery service is very prevailing), there are also quite a large number of market waiting for companies to fight for it. In Taiwan, for example, Ubereats, Foodpanda were also start to be famous since 2018. Many stores have also begun to work with delivery companies, including KFC and Pizza Hut (although the delivery of the two companies itself is convenient), so the delivery service will bring a lot of revenue.
Customer Loyalty Program
Take Taiwan as an example, KFC and Pizza Hut jointly launched a membership program, each NT$ 20 spending will turn into one point to exchange a meal. Before KFC, McDonald’s had already launched a similar point program. Although it has not been official statistical data , this marketing method can indeed increase consumers’ willingness to spend.
Therefore, Yum can copy the success case of Taiwan to launch the program in other regions. The implementation of such measures will help to enhance customer loyalty and facilitate stable growth of revenue.
