Yum! Brands Set To Dominate The Global Fast Food Market
May 10 | Posted by Andrew Burchett | Show Me The Money, Top Story
As millions of people had their eyes on the prize last weekend in the Louisville, Kentucky Derby, smart investors are turning their attention to another Louisville trademark, Yum! Brands (YUM). The world’s largest food company is poised for a dominating future for diners around the world. With a proven strategy for success in global markets, a blisteringly fast paced store growth rate abroad, and very promising acquisitions and innovations in the all-important Chinese market, Yum! Brands best “Secret Recipe” may not be in its chicken, but its business plan.
Fast-Paced Growth
Over the last few years, Yum! has opened up an average of 4 new brand stores per day around the globe. The largest share of this growth is coming from its expansion in mainland China. In 2010, only counting KFC stores of the Yum! brand empire, the number of stores open for business increased by 13% to 3,000 restaurants. When compared to global giant McDonald’s (MCD) “mere” 1,500 stores in China, Yum! is in almost unheard of territory. Yum! brands as a whole have 3 times as many outlets as McDonald’s. With a superior distribution network, Yum! has a presence in over 700 cities in China, giving consumers in the 1.3 billion people population the opportunity to access its 24-hour delivery service from all corners of the country, not just its well-developed eastern coast. The company has stated that its ultimate goal is to have 20,000 KFCs up and running in China alone. Numbers like this show why Yum! is one of the most successful foreign brands to enter the Chinese market and why a bullish outlook on stock growth is prudent. CEO David Novak’s recently famous statement, “I wouldn’t trade our long-term position with any consumer company in the world,” doesn’t seem like an overstatement.
Going Global, Thinking Local
Yum! brands have taken the term localization and turned it into a blueprint for success. KFC has a breakfast menu featuring Chinese staples such as youtiao (a donut stick) and bowls of Chinese congee, accomplishing a “Chinafied” selection for patrons. In 2010, they introduced rice to the menu for the first time and even have french fries and hamburgers to compete in food markets they haven’t ventured into in the US. China alone accounted for a whopping 54% of Yum!’s overall $264 million profit in Q1 2011. Pizza Hut has taken a “fine-dining” approach in the large markets of India and China, setting the ambience and environment inside the restaurants as more of a mid-to-upper scale place to take a date, rather than the fast-food feel it maintains back home. Menu items cater to Chinese tastes in China, with seafood and shrimp topped pizzas. In both India and China, customers can order imported wine to go along with their meals. Chinese customers are clearly responding positively to Yum!’s menu selection, as revenue at Chinese outlets rose 13% in Q1 2011. By setting itself up as a higher end brand and tapping into local tastes, Yum! expands globally by thinking locally.
Innovations and Acquisitions
Yum! has launched its own unique Chinese food restaurant, East Dawning, to further dominate the food industry in China, serving only traditional Chinese food cooked in Chinese style pots and dishes. Chairman and CEO of Yum! China Division, Sam Su, expects East Dawning’s brand association with KFC to have a strong, positive effect on Chinese consumers. Yum! also recently issued a preliminary proposal to to take full control of China’s largest hot pot chain, Little Sheep. Already owning a 27.2% ownership stake in the company, Yum! is seeking to capitalize on the average sales growth of 14% seen in all Chinese restaurants in the first half of 2010 by acquiring one of the most prominent Chinese brands in the food industry. Investors who value diversification within large corporations are praising Yum!’s moves into new markets, likely helping it to avoid another big hit like the one it took during the recent economic crisis.
A Look At The Numbers
Yum! is a growth stock that is steadily increasing the dividends it pays out to its investors. Yum! first began dividend payouts to shareholders in 2004, but has seen its dividend payout rise 67% over a 4 year span from Q1 2007 to Q1 2011. It owns an attractive P/E ratio of 22.06 (at market close on May 6, 2011), higher than the industry’s P/E of about 18.70. Yum! is successfully reinvesting what it earns to achieve additional earnings, with an eye-opening ROE of 84.66%, compared to the industry average of just 28.50%. Despite relatively dismal numbers in the US and Europe, it saw net income increase by 9.5% year-on-year, further highlighting the strength of its expansion internationally in emerging markets. Prosecution lawyers dropped a lawsuit against Yum!’s Taco Bell franchise dealing with taco ingredients 2 weeks ago, so expect underperforming Taco Bell to improve upon its 2% sales drop in Q1.
Yum! Brands is riding high on the globalization wave and is leveraging its presence around the world into large financial returns, resiliently weathering a setback in its home markets in the USA. As the diverse food conglomerate further entrenches itself in the Chinese market and minds of Chinese consumers, we are bullish on its stock price to rise, along with its dividend payout in 2011.
Tags: China Stocks, David Novak, East Dawning, Growth Stocks, KFC, MCD, McDonalds, Sam Su, YUM, Yum! Brands
