Understanding the business model
In the last part of this series, we saw that China is the biggest contributor to Yum! Brands’ revenues. Now, we’ll discuss Yum! Brands’ initiatives in China. For six months ending June 2014, China’s division reported revenue of $3 billion, or 52% of Yum! revenues. China only represents 15% of the more than 40,000 Yum! restaurant units.
A restaurant chain can decide to operate a restaurant. It earns revenues from either a company-owned restaurant, a franchised restaurant, or a combination of both. Examples of restaurants are Yum! Brands (YUM) and McDonald’s (MCD).
For the six months ending in June 2014, 85% or $5.05 billion of the companies’ revenues were generated by the company-owned stores. The remainder was from franchised restaurants. About 98% of restaurant revenue in China comes from company-owned stores—78% of Taco Bell’s, 72% of Kentucky Fried Chicken’s (or KFC), and 53% of Pizza Hut’s. Most of India’s revenue came from company-owned stores.
In a company-owned restaurant, the company has full control over operations. It also gets to keep all the revenues that the restaurant earned. In a franchise model, the company lets a third party use its processes to run its branded restaurant. A royalty or fee is charged from the revenues the franchise earned.
Yum! Brands earned 15%—or $0.87 million—of its revenues from franchise stores for the six months ending in June 2014. Franchise revenues include revenues from royalties as a percentage of franchise sales.
While restaurants chains—those in an exchange-traded fund (or ETF) like the Consumer Discretionary Select Sector SPDR (XLY)—choose to operate restaurants using a combination of these two business models, some restaurants—like Chipotle Mexican Grill (CMG)—choose to operate only company-owned restaurants. Some companies like to operate nearly all of the restaurants as a franchise—like Burger King (BKW).
Each market is different. What works in the U.S. may not work in China or India. Local tastes and preferences play an important role in a restaurant’s success. In the next part of the series, we’ll look at Yum! Brands’ market in China.