Initiatives for China
Yum! Brands (YUM) is beginning to focus more on higher quality offerings along with its value meals offerings. With high quality, it expects to be more profitable per transaction, in contrast to McDonald’s (MCD) and Burger King (BKW) which have stayed close to value offerings.
Growth opportunity for emerging markets abounds with only two restaurants per million compared to 58 per million in U.S. which shows room for growth. In the previous chart, the capital expenditure (or Capex) spending in China has increased each year except for 2013. Yum! Brands plans to open 650 new locations outside the U.S. by the end of 2014. Total units grew by 8% in 2013 year-over-year (or YoY), which was primarily fueled by the China’s division unit growth of 11% compared to a 4% growth in the U.S. and international division. On average, China’s units have grown 13% over five years indicating Yum! Brands’ aggressive growth in the market.
Kentucky Fried Chicken (or KFC) China is a very important segment for Yum! Brands. The management plans to improve customer experience in this market with packaging redesign, new menu boards, new uniforms, and new a restaurant design to drive more sales. It also plans to expand in China with a three-year cash payback period for KFC. The company’s decision to cut off the meat supplier that was in the news recently for packaging expired meat, shows how proactive and committed the management is towards China’s market.
Since many restaurants are jumping on the technology bandwagon, with McDonald’s (MCD) introducing self ordering kiosks, Yum! Brands is also planning to introduce a mobile application (or app), giving customers the option to pre-order and pay on the app itself. Yum! Brands also started offering free Wi-Fi to its customers in KFC, China. An investor looking to invest in the restaurant industry can invest in exchange-traded funds (or ETFs) like the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Food and Beverage ETF (PBJ).
The company will also use a tried and tested strategy of offering one item from the menu at half price per day. Also, the Pizza Hut Home Service, which is a small-box format, will deliver Chinese food in addition to pizza to grow sales.