Yum! separates China business
Yum! Brands said the China division, which will be called Yum! China, led by newly appointed chief executive Micky Pant, would focus on growth in mainland China. The Chinese part of the business accounted for 57% of Yum!’s overall business between July to September 2015, analysts China Ag noted in an article published on 27 October, making it a crucial part of the business.
Despite the huge and growing appetite for Western fast food and casual dining in China, Yum! Brands’ business in China has experienced declining sales in the past few years as a result of food safety scandals and stiff competition from other Western brands, including Starbucks and McDonald’s. In mid-October 2015, Yum stated it would lower its annual growth forecast in light of lacklustre sales, China Ag noted.
Yum! China has significant opportunity for growth, the company said, noting there was potential to grow to 20,000 restaurants or more in the future from approximately 6,900 restaurants today. One clear avenue of growth is the fact that Taco Bell is not yet in China; the brand is expanding globally, but has not yet entered the Chinese market. The company said it also planned to grow sales and profits in its existing restaurants by growing its core offering and expanding further into new initiatives such as home delivery.
Yum! Brands will make up the rest of the global business outside China. Yum! Brands will become more of a “pure play” franchiser over time, and is targeting having at least 95% of its restaurants owned and operated by franchisees by the end of 2017. It currently has a global base of more than 41,000 restaurants, with approximately 2,000 new units being opened each year.
The company does not expect to have incremental ongoing operating costs associated with operating as two separate, publicly-traded companies. The board’s unanimous decision to create two independent companies follows a rigorous review of strategic options conducted over the past year by Yum! Brands’ board of directors and management team, it said, with the assistance of independent financial and legal advisors. The transaction is expected to be completed by the end of 2016, with the legal structure and form to be announced at a later date.
“Over the past year, our management and board have thoroughly evaluated a range of value-creating opportunities that capitalise on our considerable strengths,” said Greg Creed, chief executive. “Yum! Brands will have a more stable earnings stream typical of a franchise company powered by industry-leading brands, while also benefiting from the development of the China business as a unique growth engine. In turn, our China business is self-sufficient and scalable with strong leadership in place, and is well-positioned to realise its full potential as a standalone business to capture the compelling opportunities in China.”
There are clear advantages to running the China business separately, said the board. “As an independent company, Yum! China will have a strong, predominantly Chinese leadership team in one of the world’s fastest-growing restaurant markets. The China business delivered annual revenue of $6.9 billion in 2014, and has a substantial free cash flow, with no significant debt, allowing it to focus and capitalise on the unparalleled growth opportunities ahead of it.
“Headquartered in Shanghai, Yum! China is already the leading restaurant developer in China, with approximately 6,900 restaurants in over 1,000 cities. China’s consuming class is expected to double from 300 million in 2012 to more than 600 million people by 2020, providing a strong tailwind to the growth of Yum! China. The business remains on pace to open about 700 new locations in 2015 and is targeting expansion to over 20,000 restaurants in China in the future.”