Yum Brands Strategy: Portfolio, Taco Bell & Global Growth

Origins and Portfolio Development

Yum Brands had its genesis within PepsiCo, when the soda giant began acquiring restaurant businesses to diversify its income streams and provide sales support for its core product. Over time, Pepsi assembled a diverse portfolio of fast food chains, most of which form the core of Yum Brands today. The fast food enterprise was spun off in 1997 as Tricon Global, with a core stable of Taco Bell, KFC, and Pizza Hut. Tricon later acquired Long John Silver's and most of A&W (excluding Canada). The company was an early entrant into the Chinese market in 1987, while still part of Pepsi, and has built up considerable competitive advantage there (MacNealy, 2007). All told, Yum Brands operates in 110 different countries.

The post-Pepsi version of Yum Brands has maintained its former parent's approach to portfolio building. The company is focused on developing a diverse range of fast food outlets in complementary sectors. With the acquisitions of Long John Silver's and A&W, Yum has filled five of the major categories in the fast food business: Mexican, pizza, burgers, chicken, and seafood. Additional categories remain available for expansion. Yum attempts to leverage its portfolio both directly and indirectly. In many areas, stores are clustered — sometimes within a single building — allowing consumers to have choice in one location and providing an enticement that non-clustered competitors cannot match. The most common cluster pairing is Taco Bell and KFC.

Portfolio Synergies and China Strategy

The different components of the portfolio also complement one another in terms of market penetration. In China, Yum launched KFC and Pizza Hut simultaneously. Chinese consumers have a strong affinity for chicken, making the KFC introduction a relatively safe bet, but the country had no established history of pizza consumption. KFC's early cash flows and operating synergies helped support the buildup of the pizza business alongside it.

The different companies within Yum generally share resources. Under Pepsi, such cross-business cooperation was strictly discouraged, but Yum recognized the potential for building operational synergies. All of the brands share purchasing and distribution, enabling significant economies of scale. In China, the shared distribution chain allows Yum to take its other brands wherever KFC has already established a presence — KFC holds greater fast food market penetration in China than any other competitor. In North America, shared purchasing has enabled greater bulk buying and enhanced leverage over suppliers, helping Yum drive down costs.

Yum's vision is one of "runaway" growth, defined as 10% earnings-per-share improvement annually. Four key strategies support this vision: building leading brands in every category in China; pursuing aggressive international expansion to build strong brands everywhere; dramatically improving U.S. brand positions, consistency, and returns; and driving long-term shareholder and franchisee value (Yum.com, 2009).

Financial Performance and Growth Prospects

Yum Brands has generally strong financial performance. In the most recent reported year, the company earned $928 million on sales of $11.09 billion. Revenues and profits improved each year for the prior five years. To facilitate this growth, the company doubled its long-term debt over that same period. As a result, the company became overleveraged and carried negative equity. It remained liquid, however, with a current ratio of 0.7 and interest coverage of 7.9 times. The company turns over its inventory and receivables quickly, though below the industry average rate. Although Yum's financials are broadly sound aside from the leverage issue, the company underperforms the industry average on most measures (MSN Moneycentral, 2009).

Yum's growth prospects are strong. The company has a substantial presence in China, one of the world's fastest-growing fast food markets (MacNealy, 2007), and has staked much of its future on that market. In China, Yum operates three franchises: KFC, Pizza Hut, and East Dawning (CNBC, 2008). East Dawning is a relatively new venture focused on Chinese cuisine. It is publicized as a sibling brand to KFC and shares the KFC and Pizza Hut distribution system. East Dawning is the first of Yum's six units to have been built from scratch; the others were all acquired over time to form the broader portfolio.

Taco Bell: Strengths, Weaknesses, and Strategic Role

Taco Bell was founded by Glen Bell in San Bernardino, California, as a taco and hot dog stand. Various partners were brought on board to facilitate expansion, but Bell eventually sold out to start a new chain of his own, also called Taco Bell, in 1962. The chain began franchising two years later and was an immediate success. By 1975, Bell had resigned as Chairman, and by 1978 he sold the chain to Pepsi, which at that time already owned Pizza Hut. Pepsi operated Taco Bell independently, consistent with its corporate policy at the time, even as it added KFC and other franchises to its portfolio. When Tricon Global was spun off, Taco Bell and the other brands became better integrated.

Taco Bell has several key strengths. The company has successfully executed a low-cost strategy, supported by strong supply chain management and purchasing capabilities. It also holds strong market penetration in the United States, commanding a 54% market share in the Mexican fast food segment, with the highest sales per unit in the Yum portfolio at $1.24 million in 2008 (Yum Brands Annual Report, 2008).

There are, however, notable weaknesses. Taco Bell carries a poor reputation for food quality, and the growing sophistication of consumer palates with respect to Mexican cuisine has contributed to declining interest in core Taco Bell offerings. This has made constant product innovation and heavy advertising necessary to sustain the franchise. The brand's image has been further damaged by a handful of health scandals in recent years — incidents that management has largely treated as isolated. Taken together, these factors have contributed to uneven same-store sales growth in the U.S. over recent years, though same-store sales rebounded slightly in the most recent reporting period after flatlining for several prior years (Ibid).

Taco Bell makes significant contributions to Yum's overall portfolio. It has proven an effective complement to KFC and Pizza Hut in the U.S. market, forming fast food clusters. It also contributes to the shared supply chain system. Taco Bell is Yum's largest U.S. business, with 5,588 domestic locations compared to just 245 outside the United States. Despite this domestic dominance, Taco Bell is not present in China, which is central to Yum's broader growth strategy. The brand's dependence on innovation has produced winning products that drive traffic not only to Taco Bell itself but, by extension, to other Yum outlets.

Works Cited

MacNealy, Jeremy. (2007). Fool on Call: Yum! Brands Wall of China. Motley Fool. Retrieved May 8, 2009 from http://www.fool.com/investing/general/2007/10/11/fool-on-call-yum-brands-wall-of-china.aspx

CNBC Video Report. (2008). CNBC Special Report on China Features Yum! Brands. CNBC. Retrieved May 8, 2009 from http://www.yum.com/news/pressreleases/081908.asp

Yum.com website: Multiple pages. (2009). Retrieved May 8, 2009 from www.yum.com

Taco Bell website: Multiple pages. (2009). Retrieved May 8, 2009 from http://www.tacobell.com/

Yum Brands 2008 Annual Report. Retrieved May 8, 2009 from http://www.yum.com/annualreport/docs/annualReport08.pdf