The people of America are becoming more and more health conscious as obesity is growing at a great pace. As per the Centers for Disease Control and Prevention (CDC), more than one third of US adults (35.7%) is obese. This point out the finger towards the fast-food industry as they are using trans fats (responsible for clogging arteries) in their products to make it more mouth watering.
YUM! Brands, Inc. (YUM) is still in a better position as its wings are all over the world, compared to its peers. This Louisville, Kentucky based company operates or licenses Taco Bell, KFC, Pizza Hut, and WingStreet restaurants worldwide. YUM operates in six segments: YUM Restaurants China (China or China Division), YUM Restaurants International (YRI or International Division), Taco Bell US, KFC US, Pizza Hut US, and YUM Restaurants India (India or India Division). The China Division includes mainland China, and the India Division includes India, Bangladesh, Mauritius, Nepal, and Sri Lanka. YRI includes the remainder of its international operations.
There lies an intense competition between YUM and McDonald’s (MCD). Health consciousness amongst the people has given a serious threat to this Oak Brook based company, as McDonald’s is heavily exposed to the US market. Other threats include poor product positioning. To compete with KFC and Buffalo Wild Wings (BWLD), McDonald’s introduced chicken wings (Mighty Wings). At the same restaurant that sells double cheeseburgers for a dollar, premium chicken wings don't work. The company purchased approximately 50 million pounds of chicken wings and is stuck with 10 million pounds of unsold stock.
On the other hand, McDonalds has taken down an employee resource site that told employees hamburgers and French fries were not healthy dietary choices. The company encouraged its employees through the helpline site to avoid eating burgers and fries with a soda, and suggested a healthier sandwich and salad with water, instead. Recently, McDonald’s announced that it would be closing 74 outlets in Japan. The company also reduced its profit outlook for McDonald's Japan operations for the whole year by 57%. Further, McDonald's gross margin has been on a steady decline ever since 2010.
McDonald’s is growing at a decent rate in France. Even there, Burger King Worldwide (BKW) announced a partnership with another company aimed at taking over 20% of the French market recently. Burger King opened its fourth French store on Dec. 17, 2013 and is planning on creating 1,200 new jobs within the country during the next year. In its 2012 annual report, YUM reported that its French KFC restaurants are the most lucrative in its entire portfolio.
Taco Bell is gearing up to create a niche in the heart of the customers. This brand added a new breakfast menu which opens up the door for Yum! Brands to pursue new markets for Taco Bell, and continue growing the brand. This introduction of new menu directly challenges McDonald’s as breakfast is a popular and profitable business for McDonald's.
Venture Into a Better 2014
China is especially important to Yum because the company gets more than half of its revenue from there. It has a much higher exposure to China than other companies in the fast-food sector, including McDonald's, Burger King, and Wendy's International (WEN).
On 18th December 2012, an investigation into KFC's supply chain was prompted by a report broadcast on China's national television, or CCTV which showed that some of the poultry farmers, which supplied KFC were using excessive levels of antibiotics in their chicken, a violation of Chinese law. Since then, YUM has struggled to counter reports in China that its chicken suppliers were using unapproved levels of antibiotics. On 25th January 2013, the Shanghai FDA concluded their investigation and brought no charges against Yum.
Therefore, accelerated sales can be expected from KFC during the second half of 2014. KFC is also offering new products which include golden extra-crispy chicken, larger buckets of chicken wings, and new openings of dessert corners to cross-sell to existing traffic within stores. Pizza Hut brands (Pizza Hut Casual Dining, Pizza Hut Home Service, and Pizza Hut Express) combined represents just under 10% of YUM China’s total revenue. In 2013, among approximately 400 new store openings, half are Pizza Hut stores.
Recently, the company has announced that it has appointed David Gibbs, as President of its Pizza Hut business in the US, and Jason Marker, as General Manager of its KFC business in the US. This year YUM reorganized its business by combining its YUM Restaurants International (YRI) and the US individual divisions for KFC, Pizza Hut, and Taco Bell. YUM Restaurants China and YUM Restaurants India remain separate divisions given their strategic importance and enormous growth potential.
India Holds Huge Potential
YUM sees a lot of potential in India, as it has the sixth-highest consumption of poultry in the world. For this reason, KFC has become much popular among Indian people. Pizza Hut has also built a great reputation in India, and has been named the No. 1 most trusted food-service brand seven years in a row. YUM is also introducing Taco Bell to the Indian market. There are only four locations in the city of Bangalore. YUM aims to invest $100 million in the Indian market over the next three to four years, and plans to have more than 2,000 locations by 2020.
To Wrap It Up
2014 will be a great year for YUM and its valued investors as the company has chalked out several growth plans strategically. Further, problems in China have also come to an end. Therefore, YUM is all set to sail its ship. Except for the year 2013, the company is expected to maintain double-digit revenue and earnings growth for at least a couple of years into the future. The company is also forecasting earnings-per-share growth of 20%.
Valued investors can expect more returns because of YUM’s strong foothold in Africa compared to McDonald’s. I am pretty bullish that this company (ranked 201 on the Fortune 500 List) won’t let its customers as well as valued investors down in the long run.