KFC finger licking good
YUMs most important brand in China is KFC with over 4,600 restaurants in nearly 1,000 cities across the country. YUM is opening 700 new stores in China this year the aggressive roll out of stores has made KFC one of the most well known foreign brands in China. 90% of KFC's profits come from overseas.
Source: YUM brands investor presentation
China causing indigestion
YUM brands is dominant in China with 39% market share. The growth story is that YUM will have well over 20,000 restaurants across all their concepts in China. YUM has five restaurants per 1 million people in China compared to 60 restaurants per 1 million people in the United States. But recently YUM has struggled. Customers dine at YUM and pay a premium to local prices because they believe the food is clean and the brand can be trusted. With two supply issues in the past two years customers are already looking elsewhere (see above for 2013 figures). KFC will eventually bounce back but it may not be to the same sale levels given recurring supply issues and increasing local competition.
There is another but its struggling too
YUM's other power brand is Pizza Hut but its growth is slowing in the US. Long known for dine in pizza, Pizza Hut is struggling with the move to online. Pizza Hut recently reported a (2%) same store sales decline in the US. Compared to a reinvigorated Domino's which reported a 7.7% increase in US same store sales. Domino's smaller store format and leadership in technology with one of the most downloaded apps means Pizza Hut has a lot of work to do just to catchup. Pizza Hut in China is also suffering from similar supply issues as KFC. Amazingly only 30% of sales at Pizza Hut is pizza the majority is past, rice, soups and salads! See below.
Their other major brand Taco Bell operates only in the US. It grew a respectable 3% in same store sales though these numbers were inflated with the introduction of breakfast earlier this year. Given these results YUM is trying to tap into the general move to higher quality, fresh ingredients with meals that are better for you. Following in the footsteps of Chipotle YUM are trialing a Vietnamese street food chain Banh Shop and a more upscale Taco Bell called Taco Co.
Change is not always good
David Novak has been a great leader at YUM with a great track record of growth. But he is stepping down as CEO transitioning to the chairman role. He has been one of the major reasons for success since the spin off from Pepsico being CEO from 2000 onwards. As an investor its never a good sign when a long term leader leaves.
No tip for you
While China will likely bounce back the fact that this is the second time there has been a supply issue means that there will be a perception problem for longer. Especially as locals trial other chains that are at lower price points. While YUM has bounced back from China issues before one difference this time is weak performance in the US from Pizza Hut and Taco Bell. Flat to negative growth for KFC and Pizza Hut in the US is not a great sign as the West moves away from fast food to more healthier fare developing markets are sure to follow. YUM has a great position in China but with two supply issues and struggles in the US we believe the stock will continue to provide short term indigestion for investors.
Jason
Disclosure: Decisive has no position in Yum Brands (YUM) stock but is long Dominos (DPZ) stock.
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