Yum! Brands has been undergoing a revamp in recent years as it attempts to improve the performance of its famous divisions, KFC, Taco Bell and Pizza Hut. But can it really close the gap and challenge McDonald’s to become the world’s largest fastfood retailer, asks David Robertson.
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Yum! (formerly TRICON Global Restaurants) was spun off from PepsiCo in 1997 and this autonomy has allowed management to concentrate on upgrading the company’s brands, which most analysts agree had become as tired as three-day old pizza.
This is finally starting to translate into an improved share price: its stock has risen from US$35 at the start of 2004 to around $50.
But there is still some way to go. Yum! runs a staggering 34,000 restaurants worldwide and last year its outlets rang up sales of $28bn. McDonald’s has 2,000 fewer stores but managed restaurant sales of over $31bn. That is, McDonald’s is nearly 20% better per store.
So, how is Yum! is to close this gap and challenge McDonald’s to become the world’s largest fastfood retailer?
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By GlobalDataInternational
This is one area where Yum! has left its rival for dead thanks to its rapid growth in China.
There are now more than 200 Pizza Huts and nearly 1,400 KFCs in China, with one new store opening every day. (McDonald’s has 580 outlets).
Yum!’s international division has grown so quickly that it now contributes two-fifths of group profits compared with one-fifth in 1998.
There was a hiccup earlier this year when KFC chicken wings were removed from China over fears that they used a banned dye thought to increase the risk of cancer and this might take some of the edge off growth in 2005.
However, China remains Yum!’s most significant success in recent years and the clearest evidence yet that it is capable of challenging McDonald’s for fastfood supremacy.
Pizza Hut
Dallas-based Pizza Hut is by far the largest pizza chain in the US, with sales of over $5bn in 2003 – a near 20% market share. But the brand is facing pressure from rivals like Domino’s, which recently listed on the stock market, and Papa John’s. As a result Pizza Hut has just completed a major rethink of its marketing strategy.
Research has shown that Pizza Hut’s previous target audience (18-34 year old males) no longer make up the majority of its customers. Families now account for 70% of take-out pizzas with “mom” making the decision on what to eat 85% of the time.
As a result Pizza Hut has started offering more value meals and pizzas with different toppings on the same delivery. The company has also introduced a loyalty rewards scheme and its advertising features families “gathering around the good stuff”.
A spokeswoman said: “We are continuing to execute our strategy of providing pizza innovation with new and exciting pizza news and also offering great value.”
The other issue facing Pizza Hut is how to manage the “dining in” experience. The company has never quite confirmed whether it is a fastfood outlet or a proper waitress-serviced diner. The latest remodelling effort seems unlikely to resolve this confusion as some stores will remain essentially counter-sales only while others have gone “Italian Bistro” serving wine, pasta and an array of chicken wings.
Analysts at Credit Suisse First Boston recently commented: “Sprucing up older dine-in assets remains a priority… We have seen remodel programs before at this chain, so while this appears to have support at the highest levels of management, we are cautious of its rollout.”
KFC
Louisville-based KFC had been in a slump for several years when its president, Cheryl Bacheldor, resigned in 2003. Since then this brand has also been given the revamp treatment (much of the lessons learned from revamping KFC were applied to Pizza Hut).
KFC added a cheap chicken sandwich to its menu called the Snacker and also brought back the cardboard chicken buckets, which were dumped in the 1990s.
Like Pizza Hut, KFC has positioned itself towards family dining and the buckets are being used as variety containers to satisfy differing tastes within each family.
Last year, worldwide sales for the division were nearly half of Yum!’s total and its international growth is strong.
The company is even bringing back the old Kentucky Fried Chicken name. A spokeswoman said: “We did an Internet survey and found out that our customers want us to call our chicken Kentucky Fried Chicken – over 80% of the people said call it Kentucky Fried Chicken.
“We believe that Kentucky Fried Chicken as a way to describe our product, our historical equity, is a powerful way to be more authentic, more genuine and really bring forward the fact that we’re Chicken Capitol USA.”
Taco Bell
Irvine, California-based Taco Bell was the first of Yum!’s divisions to be revamped at the end of the 1990s and the company is pleased with its progress.
“Taco Bell’s growth in the last four years has made it our biggest business in terms of profit generation,” David Novak, chairman and chief executive of Yum!, said at the company’s most recent results conference. “We’re beginning to step up unit growth at Taco Bell as unit economics are outstanding for both company and franchise partner development.”
But analysts are concerned that the chain could be heading into trouble as it becomes increasingly reliant on its value menu. While other chains use the value menu as an enticement to purchase bigger ticket products, Taco Bell’s reputation for low-quality menu items means there is less to trade up to.
One of the tactics being used by Yum! to boost sales at Taco Bell is to combine it with KFC – an increasingly popular trend in fastfood called multibranding. As Taco Bell gets most of its custom at lunchtime and KFC in the evening it makes sense to have both brands located in the same store. About 15% of Yum!’s stores are currently multibranded (not all TB-KFC) and this will rise to 23% within two years.
Since splitting from PepsiCo, Yum! has revamped all three of its major divisions (plus other smaller chains like Long John Silver’s and A&W) and has benefited hugely from doing so.
Where next?
However, it has been Yum!’s performance in China that has driven much of the recent share-price growth. Analysts now believe that China’s influence has been fully factoring into the share price and further stock growth must come from other parts of the business.
The question Yum! must now address is how to wring out further improvements from divisions that it has already revamped.
The answer would seem to be, start again. Pizza Hut still needs to establish a firm “dining in” identity; many KFC stores are already looking in need of refurbishment; and Taco Bell must address its low-quality reputation, particularly given the rapid growth of healthier options like Baja Fresh.
Although Yum!’s management deserves to be pleased with the company’s recent successes it is still nowhere near challenging McDonald’s dominance and a lot of work remains to be done to close that gap.
