Yum! Brands lifted again by China

Oct. 4, 2011 | by Alicia Kelso

Yum! Brands Inc. announced its third quarter 2011 results for the period ended Sept. 3, including an operating profit growth of 7 percent in China and 3 percent at Yum! Restaurants International.

The strong performance in China and other emerging markets offsets an operating profit decline of 16 percent in the U.S.

Yum! reconfirms full year EPS growth forecast of at least 12 percent, excluding special items.

Other Q3 '11 highlights include:

  • Worldwide system sales grew 6 percent, prior to foreign currency translation, including 29 percent in China and 8 percent at YRI.
  • System sales in the U.S. declined 3 percent.
  • Strong international development continued with 331 new restaurants opened, including 138 new units in China. Yum! is now expecting to open a record 600 new units in China this year. Additionally, the company anticipates 900 new units in YRI.
  • Same-store sales grew 19 percent in China and 3 percent at YRI, while declining 3 percent in the U.S. Worldwide restaurant margin declined 1.9 percentage points to 17.2 percent.
  • The full-year EPS growth forecast will make 2011 the 10th consecutive year Yum! has exceeded its annual target of at least 10 percent EPS growth.

China continues to be a boon

Once again, China has proven to be a strong profit generator for Yum! Brands, particularly behind its KFC and Pizza Hut brands.

"We are particularly pleased with our China business which reported record transaction growth and record expected new unit growth," said Yum! CEO David Novak. "There's no question China has powerful brand equity at both KFC and pizza hut with outstanding new unit returns."

KFC added 110 new units during the quarter and now has nearly 3,500 restaurants, making it the largest western QSR concept in China. The chicken concept's menu also includes beef, seafood and rice dishes that more broadly appeal to Chinese customers.

Novak said there were four key initiatives in place to grow the KFC China business, leading with breakfast. Rolled out about a year ago, the breakfast daypart is now available in nearly all units, and has seen transactions double this year, accounting for about 30 percent of the brand's total transaction growth. Breakfast now accounts for 7 percent of the overall sales.

The other initiatives include delivery, which is now available in about 1,600 KFC units mostly in higher-tiered cities; the expansion of 24 hour operations, now in about 50 percent of units; and a focus on the lunch and afternoon snack dayparts.

Pizza Hut China has also witnessed "tremendous growth and vibrancy," according to Novak, and now includes 560 units in 120 cities. The Pizza Hut menu is revamped twice a year, with beef, chicken and rice dishes, as well as appetizers, beverages and desserts.

"We have seen success in building a true casual dining concept with Pizza Hut. New unit returns are now comparable to KFC and we expect to open 100 new units this year," Novak said.

Yum! Restaurants International

At Yum! Restaurants International (YRI), operating profit increased 3 percent in the quarter and 7 percent year-to-date, prior to foreign currency translation. Novak said operating profit was negatively impacted by 5 percent due to anticipated closures related to the decision to completely refranchise the Pizza Hut business in the U.K.

"As our focus shifts to high growth high return, we decided this business would be better served in hands of a capable franchisee," he said.

This quarter, 193 new units were opened, 127 of which are located in emerging markets. Novak said there are five markets Yum! is particularly excited about, including India, Russia, France, Africa and Germany.

"Last year, these markets contributed $60 million in profits, but they're expected to contribute over $300 million in the next five years," he said.

U.S. disappoints

Yum! Brand's international growth was offset a bit by a 16 percent decline in U.S. profits.

"We're obviously disappointed in our U.S. performance. However, we have aggressively developed a pipeline of category leading innovation and have productivity initiatives planned to dramatically improve sales and profit performance in 2012," Novak said.

Taco Bell, which generates about 60 percent of Yum!'s business, saw same-store sales decline 2 percent in the quarter, which is an improvement from -5 percent in Q2.

Taco Bell's sales continue to be affected by a lawsuit filed earlier this year questioning the beef content of its filling. The chain expects a turnaround by the first quarter of 2012, buoyed by the introduction of new products currently in the pipeline.

"What we think will get Taco Bell back on track is more category innovation and we've proven in test markets that we have exactly that coming. In conjunction with its 50th anniversary, we're reinventing the taco. We have major news coming around the end of the first quarter, and then we'll have significant uplift," Novak said.

Also during the quarter, Pizza Hut witnessed a 3 percent drop, while KFC was down 3 percent. Still, the company remains optimistic behind its international performance, with Novak saying it's on the "ground floor" of internatioal growth potential.

"There are three keys to driving shareholder value: New unit development, same-store sales growth and return on invested capital. Our opportunity expand is now bigger than ever," he said.

Read more about operations management.

Topics: Business Strategy and Profitability , Franchising & Growth , International , Operations Management

Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with FastCasual.com, QSRweb.com and PizzaMarketplace.com has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, Consumerist.com and Franchise Asia magazine.
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