Yum! Brands Strategic Analysis

Presented By:Sean BaretichMicah Bascom

Tyler SmithJason WilliamsMengyao Yang

Agenda• Mission, Goals and Strategies• Stakeholders• External Environment• Competitive Analysis• Internal Analysis• Financial Considerations• Business Level Strategy• Corporate Level Strategy• Summary Of issues• Strategic Recommendations• Strategy Implementation

Mission, Goals & Strategies

Yum! Basics

• Headquartered in Louisville, KY• About 38,000 Locations in 110 Countries• Heavily Favor Franchise over Corporate

Ownership• 378,000 Employees as of Dec 2010• Company Claims Over 1 Million “Associates”• Fortune 500 #214• In Excess of $11 Billion in Revenue 2010

Yum! Basics

• Three Operating Segments– U.S.– China– International

• Boasts 4 New Restaurants Opened Every Day in 2010

Yum! Beginnings

• Founded October 7, 1997 as Tricon Global Restaurants, Inc. When Spun-Off by Pepsi

• Began with Pizza Hut, Taco Bell and KFC• Merged with Yorkshire Global Restaurants,

Gaining A&W and Long John Silver’s in 2002• Rebranded as Yum! Brands, Inc. at This Time

Yum! Continues to Change

• Created Wing Street in 2003

• In Process of Selling A&W and Long John Silver’s to be Completed Q4 2011

• Cleared by China’s Ministry of Commerce to Purchase Little Sheep Last Week

Mission

• “Future Back Vision”• Yum! the Defining Global Company that Feeds

the World– Famous Recognition Culture Where Everyone

Counts– Dynamic, Vibrant Brands Everywhere with One

System Operational Excellence As Our Foundation– A Company with a Huge Heart

Ownership

• Single largest shareholder– Southeastern Asset Management, Inc.– 6.5%

• Directors and Officers– 13,121,039 shares and options– About 2%

Officer Pay

• David Novak – Chair, President & CEO– Base $1,400,000 – Total $14,613,906

• Samuel Su – Vice-Chair, CEO Yum! China– Base $815,000 – Bonus $14,318,020

• Scott Bergren – CEO Pizza Hut, U.S.– Base $650,000 – Bonus $3,280,352

Yum! Current Events In Iowa

• KFC Corp. v. Iowa Department of Revenue

– Iowa Charged KFC $250,00 in Corporate Taxes

– All KFC Locations in Iowa Are Franchise

– Iowa Courts Found in Favor of the State

– U.S. Supreme Court Declined to Hear Appeal

Stakeholders

Executives

• Corporate Long term planners • Regional Tactical planners• Store Operational planners

Board

• They are the investors and deciders of who is going to be making the decisions.

• The Executives report to them and can be replaced if they do not lead in a way that makes Yum Brand profitable.

Employees

• This is the group that makes things happen. Where the Executive decide on a direction, the Employees execute the plan.

• They are the work force

Customers

• Are where the profit comes from. It is the customers who buy the goods and ultimately decide what will work and what doesn’t.

• Customers can have an effect from individual store success to regional placement of stores simply by their spending habits.

Supply Chain

• They work globally to ensure each individual store is well supplied with the materials needed to operate.

• Yum brand uses Unified Foodservice Purchasing Co-op, LLC (UFPC)

Raw materials

• The farmers who grow the food (crops and cattle). They are the unsung heroes of yum brand.

• They supply the building blocks to the good being supplied.

• UFPC spends around $5.4 billion procuring raw materials for Yum! Brand.

External Environment

Size

• Yum! Brand is the world’s largest fast food company with over 35,000 restaurants in over 110 countries.

• Yum! Brand falls in the category of Quick Service Restaurants (QSR) primarily competes with McDonald’s, Domino’s Pizza and Burger King Holdings

• Pizza Hut - leader of the US pizza QSR; operates in 92 countries, 12,685 restaurants worldwide

• Taco Bell - leader of the US Mexican QSR; operates in 14 countries, 5,846 restaurants worldwide

Growth rate

• The biggest region of growth right now is in China. Yum has a 2:1 lead over McDonalds in China.

• KFC in China is outpacing McDonalds growth at a 3:1 rate

• This is due to a few factors such as owning distribution centers in China, having a more diverse menu, focusing on health, involving itself in the community such as basketball & dance programs.

Growth Rate

• Success in the International region has been found in Europe, Russia and India.

• In the US market Yum! Brand is faced with an over saturated market.

• To give you an idea in the US they have around 18,000 restaurants to a population around 300 million; China they have around 2,000 restaurants to a population of 1.3 billion.

Differentiation

• Commodity prices drive the buying of raw materials and price flux can be felt throughout the industry.

• Yum! Brand also Differentiates with its different Restaurants as each one has its own QSR category.

• If one category were to falter the others could be sustained.

Capacity/Demand

• In the US the capacity has been met forcing Yum! to focus on improving existing services as opposed to growing.

• In China there is a huge hole that is open to possibilities.

• The International region is in between.

Entry Barriers

• There are very few entry barriers on a local (by store) level main ones being branding, finding a target audience.

• Anyone can have success competing on this level if executed right. The problem comes when you step it up to the regional level.

• In the United States competition is so tight in the QSR business that there simply is no room for anyone else.

• Without a name you cannot compete, and without competing you cannot get a name…

Exit Barriers

• Exit barriers are simple; if you cannot compete anymore you will be bought.

Susceptibility To Economic Conditions

• Yum! Brands are affected by fluctuation in commodity good prices.

• Also they can become a substitute good when the economy is poor or have the reverse happen when the economy gets better.

Importance Of The Product

• People have to eat. Because of this fact food service in general is a necessity.

• In today’s world people are always on the go and want their needs fulfilled now. This plays into the QSR as it removes all the prep-time of eating at home and wasted of sitting down to eat at a restaurant.

• Until the world slows down the demand for this product will keep increasing.

Proprietary Knowledge

• Colonel’s secret recipe, Taco Bell’s secret ingredients, Pizza huts special sauce. As long as these special attributes stay secret, Yum! Brand has a competitive advantage no other QSR can touch.

Future Of The Industry

Forces

• Food prices can drive industry costs up, recessions can have positive effects.

• Global uncertainty can have hugh impacts as to where Yum brand branches out.

• Natural disasters as well as Governments can disrupt supply chains and food growth.

Trends

• Healthy eating, Yum plans to introduce new products, improve the overall quality of restaurants as the US still represents over 59% of Yum’s revenues.

• Expand to 20,000 restaurants in China

Government

• Trade policies can have an effect. • Government takeovers can be a real concern

in their biggest market of growth.

Technology

• New menus, new styles, new targets, New supply chains, agricultural improvements, sociological improvements or reach.

Competitive Analysis

Direct Competing Firms

• McDonald’s (MCD)– Hamburgers And Chicken Sandwiches

• Domino’s Pizza (DPZ)– Pizza

• Burger King Holdings (BKC)– Hamburgers And Chicken Sandwiches

Competiton & Product Type

• Competition Is Fragmented– YUM! Offers Wide Range• Mexican (Taco Bell)• Pizza & Pasta (Pizza Hut)• Chicken (KFC)

• Products Are Commodity– Food Is Basically The Same From Chain To Chain

Supplier Relationship

• Supplier Code Of Conduct– Compliance With Laws And Regulations• Local, State, Federal, Industry

– Employment Practices• Working Hours And Conditions• Non-discrimination• Child Labor• Forced And Indentured Labor• Notification To Employees

– Audits And Inspections

The Suppliers

• Unified Foodservice Purchasing Co-op (UFPC)– Exclusive Supply Chain Management Organization

For YUM!– Headquartered In Louisville, Kentucky• Offices Across The Country

– Negotiates For Materials And Supplies• Food• Packaging• Equipment

Supplier Power & How Determined

• Supplier Power– YUM! Has Award-winning Supply Diversity• Many Suppliers Many Options

– Beneficial For Pricing• Pride Themselves On “Developing Strategic

Relationships With Minority- Or Women-owned Business Enterprises (M/Wbes)

– Bottomline: Suppliers Have Limited Power At The Co-op Purchasing Level

New Entrants & Substitutes

• Threats From New Entrants– Low• High Start Up Costs• Already Established Supply Chains

• Threats From Substitutes– High• Cook At Home• Sit-down Restaurants• Convenience Stores/Gas Stations

Change In Industry

• Industry Changes– Move To Healthier Foods• Salads/Fruits/Vegetables• Leaner Meats

– Smaller Portions– Taxing Unhealthier Foods

Internal Analysis

Strengths

• Yum! Strengths– Ever-expanding• 4 New Restaurants/Day In 2010

– Well-known Brands• Taco Bell Global Leader In Mexican Food• Pizza Hut Global Leader In Pizza• KFC Global Leader In Chicken

– Strong Advertising Campaign• Green• Health Promotion• Mediacom

Weaknesses

• YUM! Weaknesses– Sensitive to overall market• Beta Close To 1

– Beta>1 Greater Price Volatility Than The Overall Market And Are More Risky

– Beta=1 Fluctuate In Price At The Same Rate As The Market– Beta<1 Less Price Volatility Than The Overall Market And

Are Less Risky• Possible Explanations

– Increase In Food Prices– Substitutes

Distinctive Competency& Deficiency

• Competency– Manage Multiple Restaurant Chains• Many Successful Chains• Sold Off A Couple Less Successful Ones

– A&W Restaurants (A Great American Brand LLC)– Long John Silver’s (LJS Partners LLC)

• Deficiency– Chains Aren’t As Powerful As McDonald’s• McDonald’s Is A Tough Competitor

Competitive Advantage

• Yum! Offers A Broad Range Of Foods– Chicken– Pizza– Pasta– Mexican

• Competitor Chains Offer Smaller Selections

Imitation

• Competitive Advantage Imitation– Not A High Rate Of Imitation• Yum! Already Established

– Many Restaurant Chains– Established Supply Chain

• Existing Chains Could Acquire Other Chains

Financial Information & Analysis

Unqualified AuditingReport From KPMG LLP

2010 Annual Report

Basic FinancialInformation - 2010

Financial Analysis - 2010

Revenues 2006 – 2010(millions)

Net Income 2006 -2010(millions)

EPS 2006 – 2010

EPS Growth Rate2002 - 2010

Revenues From EachRestaurant In The U.S.

Compare To Competitor- McDonald’s

Comparison To Industry

Big Success In Chinese Market

Revenue From China(Billions)

Worldwide Comparison

Stock Market Performance

• Current Stock Price (From the last trade): $55.35

• Volume: 1,443,056• Shares with no par-value issued in 2009 -2010:

469• EPS – basic: $2.55• Price/Earning: 21.7

Stock Price Compared To Competitors

Business Level Strategy

Business Level Strategy

• Yum! Brands at the business level has two strategies

– Differentiating of products/services

– Low-price strategy

Differentiation

• KFC uses differentiation on their chicken– The 11 herbs and spices are a sustainable

competitive advantage

• Wing Street differentiates itself by its delivery of their wings– Short-term advantage

Low-Price

• Taco Bell and Pizza Hut

– Uses a low-price strategy to be a leader the industry

– These low-prices give them a competitive advantage that competitors find hard to match

Corporate Level Strategy

Corporate Level Strategy

• Build leading brands across China in every significant category

• Drive aggressive international expansion and build strong brands everywhere

• Dramatically improve U.S. brand positions, consistency and returns

• Drive industry-leading, long-term shareholder and franchisee value

Diversification

• Yum! uses two types of diversification

• Horizontal diversification – Each brand develops related products to go along

with its core products ( Pizza Hut bread sticks, Taco Bell nachos)

• Concentric diversification

Synergism

• Taco Bell and KFC stores

• Pizza Hut has Wing Street built in its store

• Allows for wider range of choice and cheaper upfront costs

• Important to use synergism wisely so they aren’t hurting themselves

Expansion & Exits

• In September 2011, Yum! announced they had found a buyer for Long Johns Silver, LJS Partners LLC and would sell A&W to A Great American Brand LLC.

• November 8, 2011 Yum! Was granted approval to buy Little Sheep Group Ltd.

Summary of Issues

Strategic Recommendations

Recommendations

• Yum! Should focus more heavily on the China market with Pizza Hut and Taco Bell

• Add more of healthy foods to the menu• Remove underperforming chains and add food

chains to further diversify Yum!• Acquire a firm that directly competes with

McDonald’s products

Strategy Implementation

Implementation

• The structure has been placed by KFC in China; culture is the issue

• Innovation of healthy foods and Yum! culture• Sell underperforming food chains instead of

liquidating• Add diversifying food chains that can compete

with sit-down restaurants• Collect capital and by a burger joint like In-N-

Out Burger

Sources

Sources• http://www.yum.com/company/default.asp• http://www.yum.com/investors/vision_strategy.asp• http://www.cbsnews.com/stories/2011/03/06/sunday/main20039783.shtml• http://online.wsj.com/article/SB10001424052970204554204577024720189263442.html• http://www.yum.com/responsibility/pdf/yum08csrrpt.pdf• http://www.ufpc.com/Public/Services/Purchasing.aspx• http://www.wikinvest.com/stock/Yum!_Brands_(YUM)• http://phx.corporate-ir.net/phoenix.zhtml?c=117941&p=irol-sec• http://finance.yahoo.com/q?s=YUM&ql=0• http://qa.kfc.com/about/secret.asp• http://www.yum.com/annualreport/downloads/downloads.htm• http://www.yum.com/• http://www.bloomberg.com/news/2011-09-22/yum-brands-agrees-to-sell-a-w-long-john-silver-s-chains-in

-separate-deals.html• http://www.hoovers.com/company/YUM!_Brands_Inc/hyssyi-1.html• http://news.yahoo.com/court-wont-stop-iowa-forcing-kfc-pay-tax-145109953.html• http://answers.google.com/answers/threadview/id/195306.html• http://www.yum.com/csr/food/supply/accountability.asp• http://www.ufpc.com/Public/Partners/SupDivPol.aspx• http://stocks.about.com/od/evaluatingstocks/a/beta120904.htm

Thank You

Questions?