Yum CEO: We open a KFC every 8 hours, we want to open one every 5 hours

Nicole SinclairMarkets Correspondent
Yahoo Finance

Yum China (YUMC) officially began trading today after spinning off from Yum Brands (YUM)—the fast-food operator behind Taco Bell, Pizza Hut, and KFC restaurants.

Shares of the quick-serve powerhouse were already up about 20% so far this year in anticipation of the China split, which was announced in November 2015 following activist pressure.

And the company—with over 20,000 KFC units, 16,000 Pizza Hut units, and 6,000 Taco Bell units—sees this split as a new chapter of growth, with goals to triple its store count globally.

“We’ve de-risked the business,” Yum Brands CEO Greg Creed told Yahoo Finance. “And at the same time, I think we can still unlock enormous growth potential in new brands.”

Creed said the company plans to deliver 7% system sales growth while becoming more efficient.

“Less volatility, less risk, still high growth,” he explained.

The new Yum Brands will focus on US growth along with international growth outside of China, as shown in the figure below. Meanwhile, the China business will have a specific country focus for Pizza Hut and KFC—which have a combined 7,300 restaurants—along with a developing presence for Taco Bell.

Source: Yum Brands Oct investor presentation
Source: Yum Brands Oct investor presentation

The China business

The China business, focused on continued growth, will also be a licensee to Yum Brands.

Yum Brands, which entered China in 1987 with the KFC brand, benefited from China’s growing middle class for years. But more recently, the brand—along with Pizza Hut—has been plagued by issues including a scandal at a meat supplier, bird flu outbreaks, and competition particularly from local alternatives, dampening growth in the region.

The Yum management team still sees considerable upside for growth, reiterating plans to have 20,000 China restaurants serving the country’s still-growing consumer class.

And Yum said it plans to one day have 20,000 China restaurants given continued growth in the region.

“You’ve got urbanization—75 million people a year moving into the cities…the government spending infrastructure in three main areas—roads, trains and planes…And they’re going to open 1,250 malls,” Creed said. “All of that gives us opportunity to continue to add new units and grow the business in China.”

Creed added that the China spin-off is likely to be seen more as a pure Chinese company as opposed to part of an American conglomerate, which could help boost perception and growth.

“There was a headline the other day that Jack Ma owns KFC,” Creed said, referring to the chairman of Chinese e-commerce giant Alibaba (BABA). “If Chinese people believe that Jack Ma owns KFC, that’s fantastic because that reduces the risk and volatility to reactions to things that people might have if they thought we were a US company.”

And this could be an interesting playbook for consumer-focused companies focusing on China growth, where many have continued to struggle.

Uber sold its China operations to native competitor Didi. And CEO Travis Kalanick discussed the difficulty of doing business in the region at the Vanity Fair New Establishment Summit in San Francisco last month.

“When you go into China thinking you know how to do something, you’re going to get your ass handed to you,” he said. “You have to think of everything as different until proven otherwise. [You] have to break everything down and then build the thing back up.”

Meanwhile, other fast-food chains, including McDonald’s (MCD), are looking to revamp its ownership structure in China. And other names like Apple (AAPL), Starbucks (SBUX), Disney (DIS) continue to work to win over the Chinese consumer and capture growth.

Recipe for the remaining company

At its investor day at the beginning of October, Yum announced plans to return as much as $13.5 billion to shareholders by 2019 via dividends and share buybacks.

And while it will still get 15% of revenue from China through licensing fees, Yum Brands will be de-risked and less volatile, according to Creed, once the China business is separated.

The company will also become more franchise oriented, bringing its total franchise base to 98% from 93%, Creed explained. This “asset light” strategy will ensure a more stable revenue stream and allow the company to focus on digital growth, marketing and new food offerings.

Also in focus? Developing the core brands—Taco Bell, Pizza Hut, and KFC restaurants—in the US and in international markets outside of China.

Creed emphasized particular upside for the company’s largest brand, KFC, which he sees growing from 20,000 units to 60,000.

“We open a KFC about every eight hours and we believe we can open one at least every five hours,” Creed said.

He added that there is considerable upside in emerging markets as well.

“In the emerging markets, chicken is the preferred protein—so whether it’s Asia, India, the Middle East, Africa, Russia, all of those markets are set up for us to be incredibly successful in those emerging markets with KFC,” he said. “It’s unlimited, the potential number of restaurants that we can open.”

Meanwhile, same-store sales at Pizza Hut have suffered, including a decline of 1% last quarter, as the chain transitions from a sit-down model to delivery and competition from the tech-savvy leader Domino’s (DPZ). Creed said he has confidence in this chain’s turnaround.

“We’ve got over 3,000 old Red Roof assets from the casual dining days. We’re going to get out of those over the next ten years,” Creed said. “Also we’ve got to do better with technology … and make the brand more relevant…I’m very encouraged by the leadership team at Pizza Hut. Just like we turned around our KFC business in the US, we can turn around our Pizza Hut business.”

And he added that he sees further growth at Taco Bell, which has seen outsized results, both in the US and globally.

Splitsville

This latest chapter for Yum has been applauded by investors so far. And this is the second big split for the company, which was originally spun out of Pepsi (PEP) in 1997. Are there any more splits in the future? Not anytime soon, according to Creed.

“There’s a massive advantage of having all three brands. We’re the world leaders in Mexica, we’re the world leaders in pizza and chicken,” Creed said. “We can share best practices across the brands, we can share management and talent across the brands. From a supply chain point of view, we get massive economies of scale….That’s what I’m focused on—growing all three brands in all parts of the world.”

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