"Business Case Study: Yum Brands - Company that owns 3 of the largest

fast-food chains in the US."

Introduction: Yum Brands, a formidable player in the global fast-food industry, stands as the
proud proprietor of three major chains: KFC (Kentucky Fried Chicken), Pizza Hut, and Taco Bell.
Rooted in Louisville, Kentucky, the company's rich history, strategic acquisitions, and global
presence make it a compelling subject for a comprehensive case study. This exploration aims to
unravel Yum Brands' journey through the decades, analyze its responses to challenges, and
provide an in-depth examination of its financial and operational dynamics.
Historical Evolution: The genesis of Yum Brands can be traced back to 1986 when Colonel
Sanders' iconic KFC, thriving at his retirement age, caught the attention of PepsiCo. This
marked the beginning of a transformative journey as PepsiCo went on to acquire Pizza Hut
(1977) and Taco Bell (1978) a decade earlier. Restaurants constituted 36% of PepsiCo's
portfolio, contributing a substantial $3.7 billion to profits. However, faced with financial setbacks,
PepsiCo shifted focus to fast food and snacks, leading to the formation of Tricon Global
Restaurants. In 2002, a significant rebranding occurred, and Yum! Brands emerged.
Global Expansion and Merger Dynamics: Yum! Brands wasted no time in expanding its
portfolio. The acquisition of Yorkshire Global Restaurants in the same year, owner of AW (Root
Beer Company) and Long John Silver (seafood chain), not only diversified Yum's offerings but
also brought a unique challenge. Yum had a lifetime contract with PepsiCo, and these newly
acquired chains were selling Pepsi as their side drink. This stood in stark contrast to competitors
like McDonald's and Burger King, who favored Coca-Cola. (An interesting exception emerged in
South Africa, where KFC now serves Coca-Cola as a side drink.)
The merger significantly bolstered Yum's restaurant count, targeting a substantial $5 billion
addition to sales. In 2004, Yum Brands ventured into Shanghai, China, introducing a cafeteria-
style restaurant named East Dawning. With China already hosting 1000 KFC outlets, this
experiment blended KFC's business model with Chinese cuisine, marking the beginning of
Yum's profound market contribution in China.
Global Expansion Strategy and Unconventional Moves: Yum Brands, guided by a vision of
overseas growth, took a bold step in 2012 by opening the first American fast-food restaurant in
the Palestinian territory. Entrepreneur Adeeb Bakri played a pivotal role in this endeavor, defying
conventional norms. While Israeli franchise owners insisted on Palestinians going through
Israeli companies, Bakri established his own franchise. Despite warnings of potential boycotts
due to U.S. support of Israel, Bakri's commitment to sourcing locally proved to be a success.
A year later, Yum Brands brought its Western cuisine to Mongolia, making waves by not only
establishing the first KFC restaurant in the country but also introducing the country's maiden
Western fast-food establishment. The inclusion of the drive-thru concept marked a resounding
success for Yum Brands in Mongolia.
Strategic Divestitures and Yum China's Emergence: Not all ventures aligned seamlessly
with Yum Brands' strategy. After nine years of partnership, AW and Long John Silver were sold
off, a trend mirrored by Back Yard Burgers and Pasta Bravo in China. By 2016, China's
significance to the company necessitated a separate entity, and Yum China was born. Exclusive
rights to select locations of KFC, Pizza Hut, and Taco Bell in China were granted to Yum China.
It rapidly rose to dominance, claiming Pizza Hut as the top 'casual dining restaurant' and KFC
as the 'top quick-service restaurant brand.' KFC's rapid expansion in China, averaging 50%
growth annually since its 1987 debut in Beijing, remains unparalleled globally.
Current Landscape and Digital Dominance: Based in Louisville, Kentucky, Yum Brands
stands as a testament to timeless appeal, leveraging data analytics extensively. With over
55,000 restaurants spanning 140 countries, the brand showcases resilience and innovation.
Recent quarters reflect a substantial shift towards digital channels, constituting 45% of sales.
Yum achieved a third consecutive quarter of double-digit systems sale growth, reaching $7
billion in digital sales in 2023. Taco Bell emerged as a powerhouse, contributing up to 75% of
U.S. profits, emphasizing value, convenience, and delectable experiences.
The core operating profit surged, accompanied by a remarkable increase in digital sales, driven
by substantial investments and digital strategies. While Taco Bell's double-digit margin reached
14.9%, it trailed estimates slightly, echoing in earnings per share figures. Store-level margins
play a pivotal role in determining franchisee profitability, underlining the importance of strategic
decision-making.
China's Role in Yum's Growth: In a strategic move in 2016, Yum Brands spun off its Chinese
operations into a standalone entity called Yum China. This move highlighted the crucial role
China played in Yum's global growth, with Yum China operating over 11,000 restaurants in 1600
cities. China's significance in Yum Brands' narrative is emblematic of the brand's global
success.
Challenges and Scandals: The trajectory for Yum Brands has not been without its share of
challenges. Scandals, such as the tainted meat accusations in 2013 and the food supplier
scandal in 2014, posed significant tests. The recent incident in 2019, involving a KFC outlet in
Mongolia, raised concerns about food safety, prompting temporary closures for inspections and
underscoring the ongoing challenges faced by the company.
Stock Analysis: An in-depth analysis of Yum Brands' stock reveals a nuanced financial
performance. While the company demonstrates steady revenue growth, concerns about debt
levels and the strategic decision to spin off Yum China in 2016 underscore the complexities and
challenges faced. Despite these hurdles, Yum Brands remains a formidable player, exhibiting
consistent growth in a dynamic industry.
1. Corporate Details:
 Yum! Brands is headquartered in Louisville, Kentucky.
 The company employs around 34,000 people.
2. Price Action:
 Yum! Brands had a compound annual growth rate (CAGR) of about 3% on a
one-year chart and 7% on a five-year chart.
 3. Investment Performance:
 Yum! Brands' share price showed steady growth over time.
 A back test comparison indicated underperformance compared to the S&P 500.
4. Fundamentals:
 Gross margin: 49%
 5-year Revenue CAGR: 5%
 5-year Free Cash Flow CAGR: 7%
 Return on Invested Capital: 42%
 Net Debt to EBITDA: 4.5
5. Dividends:
 Dividend yield: 1%
 Payout ratio: 41%
 Dividend per share growth over 3 years: 10%
 Dividend per share growth over 5 years: 12%
6. Valuation:
 Yum! Brands is considered fairly valued relative to the S&P 500.
 PEG ratio: 1.7, suggesting a bit of overvaluation based on expected earnings
growth.
7. Debt:
 Net debt to EBITDA is 4.5, indicating the number of years of earnings needed to
pay down debt.
 Debt is mentioned as a concern, with a hope for improved debt control.
Recent Financial Performance: In the latest quarter, Yum Brands grappled with challenges,
particularly at Pizza Hut in the US, where sales remained flat. However, KFC and Taco Bell
showcased global growth in same-store sales. Though the company reported lower-than-
expected revenue, it exceeded expectations in adjusted earnings per share, highlighting its
financial resilience and adaptability.
Operational Insights: Yum Brands' operational success lies in its adeptness at adapting to
evolving consumer trends. The digital era has seen a surge in online sales, with digital
strategies and investments playing a pivotal role in the company's continued success.
Innovations such as Taco Bell's $2 cravings menu and Pizza Hut's value meals have
significantly contributed to the company's sales growth. Additionally, Yum Brands has invested
in cutting-edge AI technology, exemplified by the acquisition of Dragon Tail, enhancing order
efficiency.
Leadership and Cultural Impact: The leadership at Yum Brands, particularly under former
CEO David Novak, has left an indelible mark on the company's culture. Novak's commitment to
employee recognition and appreciation fostered a culture where acknowledgment became
ingrained. The impact of these simple acts of recognition on workplace culture and employee
morale cannot be overstated. This emphasis on fostering a positive workplace culture has
contributed to the resilience and adaptability of Yum Brands.
Outlook and Strategy: Yum Brands is strategically positioning itself for the future by focusing
on building new entry points, such as individual meal occasions, and innovating with products
like melts and wings. Despite challenges, the company maintains optimism about the second
half of the year, emphasizing the importance of value, convenience, and innovation in its brands'
strategies. This forward-thinking approach underlines Yum Brands' commitment to staying
relevant in a rapidly changing market.
Conclusion: In conclusion, Yum Brands stands as a testament to the enduring success of a
company that has weathered decades of challenges in the ever-evolving fast-food industry. Its
ability to adapt to changing consumer preferences, particularly in emerging markets like China,
showcases its resilience. With a global footprint, a commitment to innovation, and a culture that
values employee recognition, Yum Brands remains a major player in the competitive fast-food
landscape. As it continues to navigate challenges and capitalize on opportunities, Yum Brands
is poised for sustained growth and influence in the global market, solidifying its position as a
leader in the fast-food industry.
References:

 https://youtu.be/-wKv0ht8uaU?si=5ImCKyuGo_DLk5Li
 https://youtu.be/rLGSMXodwYI?si=zRJCc5xSSfTvkLFI
 https://www.reuters.com/article/idUSL4N0AM3MZ/#:~:text=The%20firm%20has%20been
%20embroiled,antiviral%20drugs%20and%20growth%20hormones.
 https://www.reuters.com/article/us-yum-brands-mongolia-idUSKCN1Q806G/#:~:text=%22We
%20will%20carry%20out%20inspections,all%20the%20local%20KFC%20outlets.
 https://www.cnbc.com/2019/02/19/mongolia-to-suspend-kfc-outlets-after-food-poisoning-
reports.html
 https://youtu.be/q38ghSl9LfM?si=IvQgiAFseKUJwr9M