A Heard on the Call report following fourth quarter earnings
Yum! Brands Inc., the parent of KFC, Pizza Hut and Taco Bell, said expansion abroad and profit growth in the United States would enable the company to maintain the earnings momentum it achieved in fiscal 2011.
Yum’s strategy for adding more than 600 restaurants in its fast-growing China division and more than 900 locations in Yum Restaurants International, or YRI, requires that it make major investments in those markets, while also reducing ownership in its three brands’ domestic systems and spurring innovation, the company said.
“Our philosophy is pretty simple: reduce corporate ownership in highly penetrated markets, and increase exposure in underpenetrated markets,” said chief financial officer Rick Carucci.
Carucci and chief executive David Novak outlined several strategies for building up Yum’s international system and rebuilding sales domestically in 2012 during the company’s fourth-quarter earnings call with investors.
Bullish on China’s prospects
Coming off a fiscal year in which same-store sales at its three major brands in China grew considerably — up 19 percent at KFC and Pizza Hut Home Service and 17 percent at Pizza Hut Casual Dining — Yum is looking to bolster that system even further through the growth of its East Dawning concept and newly acquired Little Sheep chain, Novak and Carucci said.
“What we’re talking about now in our development engine is having KFC be the leader in Western QSRs and Pizza Hut as the leader in Western casual dining in China,” Novak said. “We’re obviously also going to develop Pizza Hut Home Service, East Dawning and Little Sheep, so our goal is to keep this engine primed and pumped.”
Carucci said the Chinese government’s rapid pace of infrastructure development is creating new opportunities for Yum, especially in emerging city clusters and transportation hubs.
Percentage increases in food and labor inflation in China are both expected to be double digits in 2012, which means that Yum likely would have to raise menu prices on top of the 7-percent increase it implemented over the course of 2011, Carucci said.
Novak expressed confidence that inflation in China, while significant, would moderate in the second half of 2012 and allow Yum to rehabilitate profit margins in that country back toward its goal of 20 percent.
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U.S. expected to return to profit growth
Domestically, the company said it should complete its refranchising of KFC and reduce corporate ownership of the chain to 5 percent by the end of the year.
Although Taco Bell’s same-store sales finished down 2 percent for the fourth quarter and the full year, Novak noted that sales began turning positive late in the fourth quarter and continued into the first quarter of 2012.
Taco Bell’s rollout of breakfast to 800 U.S. stores, as well as the expansion of the more upscale “Cantina” menu and forthcoming rollout of the Doritos Locos taco in March should turn things around this year at Taco Bell, he said.
should help franchisees make money, Novak added, because Taco Bell will take the same gradual approach with the morning meal it did with its Fourth Meal late-night menu — increasing hours of operation incrementally to manage labor costs.
“The franchisees are really excited, and we’re bullish that we’ll have a solid year, definitely better than last year,” he said. “Taco Bell is a huge opportunity for Yum … and if we can get a couple hundred thousand more in sales volume, we can eventually get to 8,000 stores in the U.S.”
Pizza Hut, which finished the fourth quarter with a 6-percent same-store sales increase, built upon a newfound value positioning the chain developed with its $10 any-pizza deal, adding the $20 Big Dinner Box in the fourth quarter, Novak said. That value combination, combined with continued use of Tuscani Pasta Tuesdays and Wing Wednesdays to diversify the brand’s revenue sources, should lead to continued sales and unit growth in 2012, Novak said.
He added that a new delivery-focused prototype with a smaller footprint allowed Pizza Hut to expand into small towns, contributing to the first year of net openings in the United States for Pizza Hut in some time.
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YRI gets steady investment in 2012
The company has set a development goal of 800 openings in YRI in 2012. Yum also plans to open 100 restaurants in 2012 in India, which was spun off into its own reporting division late last year. Many of Yum’s emerging markets are large countries with established eating-out industries where Yum has yet to add locations at the pace seen in China.
Novak said Yum was close to attaining critical mass in certain markets like France, Germany, Russia and South Africa, which would allow the company to accelerate expansion in those countries and regions, “but we’re not ready to make that call yet for 2012.”
Russia’s growth would result mostly from the rebranding of dual Rostik’s-KFC units to full KFC locations, officials said.
“In France and Germany, we’ll have fewer company-owned restaurants going forward,” Carucci said. “However, it’s still going to be a high-investment model, with what we’re calling ‘business rental,’ where we hold the lease and charge the franchisee a percentage of sales. We like what we’ve seen with it so far, because it facilitates growth. We’re comfortable sharing the upside and downside of those markets.”
Novak added that Yum sees mostly upside in those countries, where KFC has some of its highest average unit volumes in the world. From 133 KFCs in France and 76 locations in Germany, Yum generates less than $50 million in sales, Novak said, yet McDonald’s has annual sales of $1 billion in those two countries, indicating that those markets hold a lot of promise for Yum.
Yum executives credited the buyout of the company’s largest KFC franchisee in South Africa in 2010 for laying the groundwork for expansion across that continent. From a base of the company-operated stores in South Africa, they said, Yum can train managers and franchisees to enter seven new African nations in 2012.
Louisville, Ky.-based Yum operates or franchises more than 38,000 restaurants in about 110 countries.