Yum! Brands business overview and operations

YUM! BRANDS

Casual dining, as the emerging market middle class develops, will become an integral aspect of the lives of many. As markets continue to grow and develop, the need for faster, timelier consumption options will increase. Yum! Brands is in a distinct and privileged position to take full advantage of this growing trend of fast dining. Expansion and growth, however is not guaranteed as competition is particularly fierce within the fast food industry. As such, the purpose of this document is to outline the strengths, weaknesses, opportunities, and threats by which Yum! Brands is exposed to. Through this document, the operations of the company can be better catered towards enhancing the overall strengths of the business while simultaneously mitigating the more profound weaknesses. Through the effective use of the SWOT analysis method, Yum! Brands will be in a better position to grow profitability while creating a compelling value proposition for its customers (Luxenberg, 1985).

Introduction and Background of the Company

To begin, Yum! Brands is one of the world's most preeminent restaurant chains. The company, based in Louisville, Kentucky operates over 40,000 restaurants worldwide in nearly 130 countries. With annual revenues in excess of $13 Billion Yum! Brands is ranked 201st on the list of the Fortune 500 companies. My of the companies more prominent brands include KFC, Pizza Hut, and Taco Bell. What makes Yum! Brands unique is its global diversity and worldwide penetration. By offering its products and services across the world, Yum! Brands has been able to establish a truly global franchise. This is evident in the company's leadership position in emerging countries such as China, Latin America, and India.

Company History

Yum! Brands was first created in May of 1997 under the name Tricon Restaurants Inc. The creation was a direct result of a spin-off from PepsiCo, who franchise the KFC, Pizza Hut, and Taco Bell brands. Of note, due primarily to Yum! Brands previous relationship with Pepsi, nearly all its franchises has a lifetime contract with Pepsi to serve its drinks. In March 2002, Tricon announced the acquisition of Lexington, Kentucky-based Yorkshire Global Restaurants. This firm primarily owned and operated Long John Silver's and a&W Restaurants chains. After the acquisition the companies name was changed to Yum! Brands Inc. On May 16.

In January 2011, Yum! Brands announced its intentions to divest itself of its Long John Silver's and a&W brands to focus on its core brands of KFC, Pizza Hut and Taco Bell. This was due primarily to poor sales and a lack of congruence with the firms other brands. For the decade leading up to the company's announcement, major growth had relied on international expansion. Unfortunately both Long John Silver's and a&W did not have a strong presence outside the United States. As such, both companies were not congruent with the firm's long-term growth strategy (White, 2009). Shortly after divesting the two companies, Yum! Brands established Little Sheep, a Chinese packaging company, to solidify its growth in emerging markets.

Current Markets

The company currently operates in 125 countries. Its primary focus is emerging markets with account for nearly 70% of its profits. Of its 40,000 restaurants, 14,000 of them are in emerging markets, twice the nearest competitor.

SWOT

Strengths

1) Global Brand

2) Global Franchise

3) Strong Emerging Market Penetration

4) Strong Margins relative to peers in the industry

5) Strong Leadership in multiple business lines

6) Strong record of innovation and value creation

Weaknesses

1) Health Concerns

2) Only 3 core products

3) Lack of experience in some emerging markets such as India

4) High levels of debt on the company's balance sheet

5) No pricing power

6) Products can be easily substituted

Opportunities

1) Middle Class Growth Worldwide

2) Global Trade

3) Expansion into other product categories

4) Collaboration with other retailers such as Target

Threats

1) Low barriers to entry in the industry

2) Intense competition from rivals

3) Pricing pressure from rivals

4) Health advocates

5) Economic recession

6) Food and consumption legislation

7) Strong Reliance on emerging markets

8) Geo-political risks

9) Interest rates impacting the ability to expand and grow

Overview of Findings

As indicated by the above SWOT analysis the primary strength afforded to Yum! Brands is it's over global presence. A global presence creates a stronger brand that resonates with consumers. With a strong brand, the company is able to be constantly in the consideration set of its consumers. As indicated above 70% of the company's profits are generates outside the United States (Jargon, 2012). With a strong branding strategy Yum! Brands creates an economic moat that discourages competition while enhancing customer relationships. Brands are particularly critical in areas with large amounts of saturation and competition. Many competitors are attempting to make inroads in China, and other developing countries. To ward off the continual onslaught of competition on pricing and sales, a strong brand is required. Through its focus on its core franchises of KFC, Taco Bell, and Pizza hut, the company has continued to take market share through strong brand awareness. The company has also benefited from divesting its Long John Silver's and a&W restaurants. This allowed the company to divert much needed resources to its core branding and expansion overseas (Barrett, 1997).

In addition, the company has physical locations that outnumber many of its competitors. Location are critical, particularly in emerging markets. Through proper use of location, the company is positioned to be exactly where the customers need them. The company's recent collaboration with Target is a testament of this location philosophy. By having nearly doubled the amount of locations as its nearest competitor, Yum! Brands is ensuring that it remains relevant to the customer. These locations also provide enhances efficiencies and collaboration among franchises. By having multiple locations, the company is better able to gather and disseminate critical information regarding the overall dynamics of the market (Chapman, 2012).

Finally competition will be very price competitive over time. This will be a detriment to Yum! Brands as it will not have the power to raise prices significantly higher than competitors in the region. Ultimately this could hinder profitability as competitors engage in price wars to gain market share (Rood, 1969). The fast market is particularly troublesome as competitors can quick and easily create substitute products. As such, innovation that generates high returns on equity and strong revenue streams will be easily eroded away as competitors make substitute products. This is particularly true in the beverage industry. As a competitor makes a successful product, companies usually follow suit with a similar or enhanced version of the hot item. Yum! Brands will therefore be unable to price its innovative products significantly higher than its competitors as customers and market share will erode (Cyrek, 1999).

Approach and Choice of Rankings

The approach to gather relevant information for the SWOT analysis was simple and straight forward. A vast majority of the information obtained for the SWOT analysis was provided by the company's investor relations department. Aspects such as conference call transcripts, investor presentation, and earnings conference calls were used. In addition, the company's previous annual reports provided insights as the company's plans and how effective they were in execution of those plans. Past annual reports were also critical in determining management's effectiveness as leaders of the company. In addition, third party providers such as Morningstar, Bloomberg, and Yahoo finance provided many of the financial metrics used within the SWOT analysis.

In regards to ranking, those aspects that could materially impact the business were given priority over those that didn't. Aspects such as competition, restaurant density, and restaurant locations were given high priority as they are instrumental for success. Likewise, price competition and lack of barriers to entry have the potential to significantly decrease profitability, thus warranting a higher rank. Aspect, that are beyond the companies control, or that affect the industry unilaterally were given lower rankings. Aspects such as interest rates or geo-political unrest affect the entire industry and not Yum! Brands in isolation.

Recommendations

One product that will be particularly beneficial to the company is that of healthier salads and beverage alternatives. Yum! Brands and the industry as a whole, must now contend with the negative health attributes and stigma attached to its brands. In many instances, the negative publicity can alienate customers who would otherwise be loyal to the brand. To capitalize on the impending health trends of the world, Yum! Brands can establish robust product offerings that cater specifically to this market segment (James, 2006). Aspects such as smoothies, Caesar salads or vitamin drinks could capitalize on the impending trend towards health (Jensen, 2004). Health conscious individuals are particularly apt to be loyal to companies that provide healthy products. This is particularly true for many competitors to Yum! Brands including many whole foods fast food chains. The promotion surrounding the new health options would be centered on freshness and bodily benefits (Simone, 2001). The campaign will be designed to dispel many of the negative elements attributed to Yum! Brands product offerings. The campaign with therefore focus on physical activity and the benefits that can be derived from consuming health products. Aspects such as weight reduction, disease reduction, and overall peak performance will be emphasized (Jeffery, 2006). Sponsoring many of Australia's more popular sporting events with the products would also be very beneficial. Placement of these products will occur within all of the Yum! Brands locations. As mentioned above, two strengths of the company are its global positioning in regards to its brand, and its overall depth of franchises (McGinley, 2004). With more locations than any of its competitors in emerging markets, the company has a distinct competitive advantage relative to its peers in the industry. By effectively utilizing this franchise to unveil its healthier product segment, Yum! Brands can capitalize on its location density. The locations are also very useful in regards to cross selling many of the newer health option that customers may not be aware off. By placing the new products in all of its location simultaneously the company ensures that its distribution network is running optimally (Schlosses, 2001).

One of the more contentious areas in regards to the marketing mix is that of pricing. As mentioned in the SWOT analysis above, pricing is a detriment to the industry. With very low barriers to entry, competitors can often arise without warning. As such, these competitors can be widespread and ubiquitous throughout the Australian region. These competitors may have a capital structure that allows them to charge lower prices and ultimately taking market share. To properly combat this issue Yum! Brands must price their products as reasonably as possible to avoid the possibility of alienating customers. Prices therefore should correspond to the overall market for health products in Australia. Due to competition the company does not have the ability to raise prices well in excess of the competition. Therefore pricing should be in line with competitors (Levinstein, 2003).