Yum Brands Inc overview and business analysis

YUM! Brands

Executive Summary for YUM Brands, Inc.

According to their corporate profile (2007), YUM! Brands, Inc. competes as a quick service restaurant company; the company develops, operates, franchises, and licenses a system of restaurants that prepare, package, and sell a variety of food items in their far-flung operations around the world (About Yum! Brands 1). The company operates some of the world's most popular eateries. For instance, in their book, Applied Public Relations: Cases in Stakeholder Management, Lamb and McKee (2005) report that, "KFC is one of five quick-service restaurant chains operated by Yum! Brands. The others are Pizza Hut, Taco Bell, Long John Silver's, and a&W All-American Food. In 2002, YUM!'s revenues exceeded $7.7 billion, and net income was $583 million. In total sales, only McDonald's was larger among quick-service restaurant corporations" (197).

This author points out that the company's KFC brand has been especially well received outside of the United States and currently represents approximately 66% of the company's international revenues (Lamb and McKee 197). The company's corporate profile notes that YUM!.".. restaurants specialize in chicken, pizza, Mexican-style food, and quick-service seafood categories. As of December 31, 2006, it operated approximately 34,000 restaurants in 100 countries and territories. The company was founded in 1997. It was formerly known as TRICON Global Restaurants, Inc. And changed its name to YUM! Brands, Inc. In 2002. YUM! Brands, Inc. is headquartered in Louisville, Kentucky" (About YUM! Brands 2).

Today, YUM! Brands, Inc. (hereinafter "YUM" or, alternatively, the "company") is the world's largest restaurant company in terms of system restaurants, and has more than 34,000 restaurants in more than 100 countries and territories operating under the KFC, Pizza Hut, Taco Bell, Long John Silver's or a&W All-American Food Restaurants brands. Four of the Company's restaurant brands (Pizza Hut, KFC, Taco Bell and Long John Silver's) are the global leaders in the pizza, chicken, Mexican-style food and quick-service seafood categories, respectively (About YUM! Brands 2).

YUM's business consists of three reporting segments as follows:

United States. Yum! Brands, Inc., based in Louisville, Ky., is the world's largest restaurant company in terms of system restaurants with over 34,000 restaurants in over 100 countries. Four of our restaurant brands - KFC, Long John Silver's, Pizza Hut and Taco Bell - are the global leaders of the chicken, quick-service seafood, pizza and Mexican-style food categories. a&W Restaurants is the longest running quick-service franchise chain in America. In 2006, Yum! Brands generated more than $9.5 billion in total revenues, including company sales and franchise fees. (About YUM Brands 1).

The International Division. Headquartered in Dallas, Texas, YUM! Restaurants International represents the largest division of YUM! Brands; this business segment operates almost 12,000 restaurants outside the U.S. (excluding Yum! China Division) (About YUM! Brands 3). During 2006, operating profits for YRI were over $400 million and the company's growth has not slowed; in fact, during each of the last seven years, YRI has opened over 700 new restaurants (About YUM Brands 3). This growth is mirrored abroad as well. In fact, outside the United States in 2006, the company opened almost 1,100 new restaurants, making YUM! Brands, Inc. one of the fastest growing retailers in the world today. The company proudly notes, "We have a large, growing, profitable, high-return international business and a strong growth opportunity with two global brands, KFC and Pizza Hut" (About YUM Brands 2).

The China Division. The China Division includes mainland China, Thailand and KFC Taiwan and the International Division includes the remainder of our international operations. The China and International Divisions have been experiencing dramatic growth and now represent approximately half of the Company's operating profits. The U.S. business operates in a highly competitive marketplace resulting in slower profit growth; however, this business segment continues to produce strong cash flows as well (About YUM Brands 1). The Yum! China Division, based in Shanghai, has been reported separately since the beginning of 2005 due to its size, unique strength and importance. Today our Yum! China Division has more than 2,600 system restaurants (Q4 2006). Mainland China is currently the company's number one market for new company restaurant development worldwide. In 2006, operating profits for the China Division were more than $290 million. Our strategy is to be the leader in every significant food service category in mainland China. KFC is the number one quick-service restaurant brand and Pizza Hut is the number one casual dining brand in mainland China (About YUM Brands 2). According to the company's President of YUM! China, Sam Su (2007), "Yum! China now has more than 130,000 employees and 1 billion annual customer count. Our new brands are also doing well. Pizza Hut Delivery is now present in Beijing, Shanghai, Guangzhou, Nanjing, Shenzhen and Hangzhou; and the Chinese QSR brand East Dawning now has eight stores in Shanghai" (2-3).

The company continues to focus on four key strategies as shown in Table 1 below:

Table 1.

YUM! Brand Key Strategies.

Strategy

Description

Build Dominant China Brands

The most recent quarterly report filing for YUM! notes that the company has enjoyed healthy returns on its investments in the KFC and Pizza Hut brands in China, promoting both into the leading quick service and casual dining restaurants, respectively, in mainland China. Based on this strong competitive position, a burgeoning economy and a population of 1.3 billion in mainland China, YUM! anticipates continued success and is adding KFC and Pizza Hut Casual Dining restaurants and testing the additional restaurant concepts of Pizza Hut Home Service (pizza delivery) and East Dawning (Chinese food) to their expansion initiatives. The company's ongoing earnings growth model includes annual system-sales growth of 20% in mainland China driven by at least 375 new restaurants each year, a rate they anticipate will fuel annual operating profit growth of 20% in the China Division.

Drive Profitable International Division Expansion

The company and its franchisees opened over 700 new restaurants in 2006 in the Company's International Division, representing seven straight years of opening over 700 restaurants. The International Division generated over $400 million in operating profit in 2006 up from $186 million in 1998. The company reports that it expects continued strong growth by building out existing markets and growing in new markets including India, France and Russia. YUM!'s ongoing earnings growth model includes annual operating profit growth of 10% driven by 750 new restaurant openings annually for the International Division. New unit development is expected to contribute to system sales growth of at least 5% (at least 3% unit growth and 2% to 3% same store sales growth) annually. According to its "International Opportunities" post on its Web site, YUM! states: "One of Yum! Brands' four key business strategies is to drive profitable international growth. 2004 was the fifth straight year that, Yum! Restaurants International (excluding Yum! China Division) has opened more than 700 new restaurants outside the U.S. We've achieved this growth while more than doubling our operating profits since Yum! Brands became a public company in 1997" (1).

Improve U.S. Brands Positions and Returns

The company emphasizes its expertise in multibranding, with over 3,500 restaurants providing customers two or more of our brands at a single location. The company also reports that it is not content to rest on its corporate laurels but rather seeks to continually improve returns and ownership positions with an earn the right to own philosophy on company owned restaurants. The company's ongoing earnings growth model calls for annual operating profit growth of 5% in the U.S. with same store sales growth of 2% to 3% and leverage of our General and Administrative infrastructure.

Drive High Return on Invested Capital & Strong Shareholder Payout

The company remains focused on delivering high returns and returning substantial cash flows to its shareholders via share repurchases and dividends. In this regard, the company has one of the highest returns on invested capital in the Quick Service Restaurants ("QSR") industry. The Company is targeting an annual dividend payout ratio of 35% to 40% of net income.

Source: Form 10-Q (October 2007).

The company's stock performance for the previous five years to date is shown in Figure 1 below.

Figure 1: YUM! Brands, Inc. - Stock Performance - Past Five Years to Date

Source: Yahoo! Finance, 2007.

Value Chain Analysis for YUM Brands Inc.

Primary Activities (Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, Service)

The company's logistics management is truly global in scope. According to Elango (2007), "YUM! Brands alone reported opening more than 1,000 international units in just one year. YUM! Brands has nearly 11,000 of its 30,000 units located in over 100 countries" (179). Because each of the business segments of YUM! represents an enormous entity in and of itself, across the board comparisons are difficult but some insights into the company's overall operations can be gained from a review of their restaurant outlets and the manner in which they are administered. For instance, today, the company owns and operates 22% of the more than 34,000 restaurants, while 72% are operated by franchisees and unconsolidated affiliates and 6% are operated by licensees (About YUM! Brands 2). According to Spring (2002), in 2002, YUM! Brands acquired a&W and Long John Silver's; at that time, the company reported that, "The acquisition allows us to accelerate our multi-branding strategy and...to be expanded international leaders...in chicken, pizza, Mexican and seafood" (quoted in Spring at 203).

As noted above, the company's motto is, "Our passion is to put YUM on our customer's faces all over the world," and this marketing approach appears to be paying big dividends. Indeed, Spring notes that YUM! Brands is currently a leader in the construction and operation of themed environments: "For instance, in 1922, the a&W logo was created by Roy Allen and Frank Wright to represent their two last names. Opening in Lodi, California, the men constructed an outdoor stand that looked like a root beer barrel. In 1923, a&W developed the first car-hop service initiating the spread of drive-in restaurants. Later restaurants relied on the logo rather than the barrel design for name recognition" (Spring 203).

Likewise, when Long John Silver's was opened in 1968, it featured new "exteriors," described by the company as being "a stronger retail identity with bolder colors, accent stripes, illuminated canopies on drive-thrus, and a new roof design" (quoted in Spring at 203). As Waldo (2006) points out, when it comes to eating out, "Consumers crave choice, quality, and affordable luxury. This has translated into growth for several food and dining niches. Multiple brands under one roof such as YUM! Brands (KFC, Taco Bell, Pizza Hut, etc.) fill this demand by offering an array of menu items. Juice it Up! serves up specialty beverages and smoothies -- great for health-conscious professionals and morns on-the-go" (104).

This mixing and matching of multiple popular brands under one roof has proven highly effective and has provided customers with some choices that they might not otherwise have readily available, thereby increasing sales for both brands. For example, as De Marco (2005) reports, "Clayton Wike got the best of both worlds when he stepped into the new Long John Silver's and a&W All American Food restaurant last week in Capitol Heights. The hungry diner feasted on the unusual combination of an a&W double bacon cheeseburger and a Long John Silver's fish sandwich for lunch. 'This beats going to a carryout,' he said, commenting on the variety of fish and burger choices he had. it's that choice that keeps Yum Brands Inc., owner of Taco Bell, KFC, Pizza Hut, Long John Silver's and a&W All American Food, mixing and matching its brands. Yum, which has combined such foods as pizza and tacos and chicken and burgers all under one roof, now has more than 2,800 multibrand restaurants worldwide, with the majority in the United States. The company added 550 stores last year and has plans to open another 550 locations in 2005 (De Marco 10). In addition, the company has announced plans for expansion of its current Long John Silver's and a&W co-branded concept, which ties fish, hamburgers and root beer together; there are currently approximately 275 such locations in the United States (De Marco 10).

Some of the company's other marketing initiatives, like many from Coca-Cola and GEICO (and perhaps, "Head on"), remain firmly embedded in the national consciousness because of their ubiquity and pervasiveness. Indeed, even today, who can forget the little Mexican Chihuahua sporting a black beret that promoted Taco Bell's "Yo quiero Taco Bell"? (Flusty 188). According to this author, the marketing wizards at YUM! recognized a winner when they saw it, and took this campaign to the extreme:

Taco Bell restaurants flew red flags emblazoned with the beret-clad animal. Car antennae sprouted red pennants, again adorned with the canine Che. And in television spots, on a balcony high above the throngs of a dusty colonial city, the Che-huahua appeared in heavy rotation at a bank of antiquated microphones. Upon the dog's echoing intonation of "-iva Gorditas!" adoring throngs chanted and sang in unison as giant red banners unfurled across the sides of buildings, each emblazoned with a massive arm holding a taco aloft. Throughout the campaign, the gorditas slogan was endlessly repeated: 'The Revolutionary Taco.' (Flusty 188).

More recently, the company has contracted for a five-year aggressive marketing campaign at the Kentucky Derby, beginning in 2006. The company's Web site's press release for the event stated, "Yum! Brands, Inc., the world's largest restaurant company in terms of units, and parent of KFC, Taco Bell, Pizza Hut, Long John Silver's and a&W Restaurants, announced today that it will debut its first advertising ever on network television as part of the first-ever sponsorship of the 132nd Kentucky Derby" (YUM! Brands Debuts Advertising 1).

According to O'Halloran (2006), though, if the marketing gurus at YUM! had managed to get everything they wanted, they would have even changed the look of the historic setting in which the race is run, an initiative that many observers felt was taking things too far: "Yum! logo, which is all over Churchill Downs this week, is causing a stir. it's on the starting gate and tote boards, in the grandstand and paddock. Even the pony riders who will escort the Derby horses to the starting gate late this afternoon will wear jackets with the logo. On television, Yum! will air six 30-second commercials during NBC's 90-minute broadcast [but] plans to place a Yum! sign on the roof between the historic twin spires were scrapped after the public raised objections" (1).

Finally, the company's most recent Form 10-Q reports that YUM! continues to focus on improving its U.S. position through differentiated products and marketing and an improved customer experience; in addition, the company has made efforts to provide industry leading new product innovation which adds sales layers and expands day parts.

Support Activities (Procurement, Technology Development, Human Resource Management, General Administration).

From a human resources perspective, a number of other companies of all sizes could look to YUM! For some sound best practices. For example, the company has been recognized as one of Fortune Magazine's "Top 50 Employers for Minorities" for the previous four years as well as being recognized as one of the "Top 50 Employers for Women" by Fortune, one of the "40 Best Companies for Diversity" by Black Enterprise Magazine for the past two years, one of the "Corporate 100 Companies Providing Opportunities for Hispanics" by Hispanic Magazine and by BusinessWeek as one of the "Top 15 Companies for in-Kind Corporate Philanthropy" (About YUM! Brands 2-3). Further, the company has been named the number one company for Work/Life Balance in Louisville, one of the Best Places to Work in Kentucky and Pizza Hut has been named the #1 Best Place to Work in Dallas (About YUM! Brands 3).