Yum!brands Strategy Analysis With Increasing

Yum!Brands Strategy Analysis With increasing competitive and market consolidation pressure on its core lines of business in the U.S., Yum! Brands turned to international markets for increased revenue and gross margin growth. Through a series of acquisitions Yum! Brands had grown to include Kentucky Fried Chicken (KFC), Pizza Hut, Taco Bell, Long John Silver's and A & W. restaurants worldwide. Combined these brands comprised 33,000 retail outlets, 12,000 of, which were located internationally, and 21,000 domestically.

With significant investments already in international markets, Yum! Brands defined their global growth strategy as developing strong market share in a small number of high-growth markets. Current financial performance for Yum! Brands also quantified the need for a sense of urgency relative to margin growth.

For FY2004 the company reported a 8.21% Corporate-Wide Net Profit Margin with 14% margin from Quick Service Restaurant) QSR-related operations, which has for the previous three years had been trending down based on increased competition from sandwich shops, pizza chains, family restaurants, dinner houses, chicken chains and non-dinner concepts domestically. Internationally however in 2004 Yum! Brands was able to attain a 13% gross margin in International Operations and 20% in the rapidly growing Chinese markets it participated in during 2004.

Despite a fundamental re-ordering of the fast food marketplace happening however, four of the Yum! Brands were the market leaders in their segments. These included Pizza Hut, KFC, Taco Bell, and Long John Silver's. Despite these market leadership positions however the company's financials indicate gross margins are beginning to flatline and KFC is becoming a cash drain despite the reinvigoration of support for the franchisees. Fixing KFC is the highest priority domestically as same-store sales volumes have been lagging industry average through 2003 and 2004.

Yum! Brands' ability to penetrate emerging high growth markets and gain significant market share had been proven with profit growth in nearly every geography entered with the exception of Mexico and Early Stage markets. Most significant is the growth of Chinese QSR sales and the potential for greater growth in that geography. Table 1, Yum Brands - International Operating Profit Reconciliation, shows a comparison of profits generated by geography in 1999 compared to 2004.

Table 1: Yum! Brands - International Operating Profit Reconciliation Strategy Yum! Brands needs to look at how a multi-brand global strategy can effectively counterbalance the weaknesses of one brand with the strengths of another, all aimed at penetrating new high growth markets. Domestically this strategy is already in motion with multibranding of KFC and Taco Bell, KFC and A&W, Pizza Hut and Taco Bell, and Pizza Hut and Long John Silver's locations with limited local and national advertising.

What Yum! Brands is experimenting with in these multi-brand location strategies is the discovery of economies of scale and enabling the experience effect when it comes to attaining greater profitability in the QSR category of products. Consolidating two QSRs into one location from different brands also has the potential of making each location more operationally efficient with the potential of dropping labor costs, which today is 30% of the cost of running a fast food chain.

There is also the pay-off of making Operations more demand-driven and efficient, which in cost savings alone could significantly increase gross margins and profits according to CIBC World Markets (2004). The international expansion strategy for Yum! Brands needs to begin first with a strong focus on where the long-term annual profit growth is going to be. According to Citigroup (2004) there is a 20% or greater long-term estimate for annual profit margin growth in China, with International markets excluding China being 10 to 15%, and lastly with the U.S.

market anticipated to deliver between 5 and 7% margin growth over the next five years. Further, the Chinese marketplace is also one marked by lower labor costs and a lack of the stigma associated with working in fast food establishments that exists in the United States and other westernized nations. Looking at Table 2: U.S. Operating Profit Source by Brand for 2004 according to SEC filings (2004) clearly Taco Bell contributes the majority of profits followed by Pizza Hut at 34%, then KFC at 15%. Long John Silver's and A & W.

have been continually losing share and profits relative to larger competitors. Table 2: U.S. Operating Profit Source by Brand Taco Bell Pizza Hut KFC Long John Silver's/A&W Contrast U.S. profit source by brand with International profit sources, and the critical role of KFC in any expansion strategy becomes clear. Table 3, International Operating Profit Source by Brand for 2004, shows the dominance of KFC overall.

Table 3: International Operating Profit Source by Brand KFC Pizza Hut Taco Bell/Long John Silver's/A&W From this analysis it's clear that KFC is one of the stronger brands with greater profit potential globally, yet key to making this possible is aligning this specific brand with a given geography. The next section of this analysis deals with the specifics of analyzing Latin American geographies in addition to China.

Geographical Assessment Latin America is one of the slower growing markets that Yum! Brands participates in during the timeframe analyzed, with just $9M in incremental sales from 1999 to 2004, rising from $33M to $42M respectively. Yum! Brands however has done extensive analysis of the highest growth Latin American nations, and a short summary by nation of opportunities and risks are presented below. The company finds these nations attractive due to the World Free Trade Agreement of the Americas and the significant reduction in.