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Heard on the call: Yum! Brands Inc.

Inflation named a 2011 headwind, international expansion remains growth strategy

Yum! Brands Inc. reiterated 2011 growth plans — including unit openings in emerging foreign markets, continued expansion in China and aggressive plans for Taco Bell in the United States — but also noted that food and labor cost inflation could be a headwind in 2011.

In a conference call with investors Thursday, executives said 2011 growth plans would include 900 new restaurants in emerging international markets and 500 new outlets in China, while growing Taco Bell from 5,000 domestic locations to 8,000 remains a long-term goal.

Chief financial officer Rick Carucci told investors the company projects 2011 food cost inflation of 5 percent in China, 4 percent in the United States and 3 percent in its markets served by Yum Restaurants International, or YRI, which includes Europe.

A wage increase in the mid-teens in China this year also would negatively affect labor costs, he said. The company recently implemented a menu price increase in China, and while Carucci wouldn’t give the specific increase, he said it covered about three-quarters of the 3.5-percent to 4-percent price hike that would be needed to maintain margins. No plans for price increases in other markets were discussed.

Still, even with cost-based headwinds in the New Year, Yum said it planned to benefit from aggressive international growth, which will drive sales and profit.

“International new-unit development remains the key driver of our growth, with 1,400 new units to open outside the U.S. in 2011,” Carucci said. “New units should deliver about half our earnings per share growth, and since 2010’s development was so back-end-loaded, the impact of growth this year will be larger than usual.”

Both Carucci and chief executive David Novak predicted that 2011 would see at least a 10-percent growth in earnings.

United States

In the United States, Yum is looking to continue the momentum it gained in 2010, as blended same-store sales among its KFC, Taco Bell, and Pizza Hut chains rose 1 percent for the full year.

Pizza Hut was the biggest turnaround story for Yum, as the pizza delivery chain restructured its pricing and posted a same-store sales increase of 8 percent last year.

“I’m extremely proud of our Pizza Hut team for restructuring the business,” Novak said. “We went from worst to first in value ratings in the pizza category.”

Pizza Hut debuted a $10 any-size pizza promotion in the first half of the year, followed by a new pricing structure that made all medium pizzas $8 and all larges $10.

Taco Bell, Yum’s most profitable U.S. brand, will be the company’s domestic expansion vehicle going forward, Novak said.

“Taco Bell is already getting net new-unit growth with high margins and average unit volumes; what we really need at Taco Bell is an incremental sales layer,” Novak said. “That’s why we’re working hard on breakfast, beverages and dinnertime home-meal replacement. If those give us another level of sales, our ability to grow Taco Bell will be demonstrated.”

Plans to grow Taco Bell will carry on as planned, even though a recent lawsuit alleging misleading advertising regarding its seasoned ground beef have done short-term damage to Taco Bell’s image and sales. Novak said Taco Bell’s marketing campaign answering the plaintiff’s claims has started to gain traction.

“Regardless of how strong your brand is, there’s no question that any incident will negatively impact its image and sales,” Novak said. “We’re seeing the negative short-term impact, and we think we have turned the tide, and we’ll wait and see the ultimate impact.”


Yum officials said they expect the company’s China division to become the first arm of the business to generate $1 billion in operating profit in the not-too-distant future. There are 3,200 KFC units in China, which typically pay back opening investments in about three years, Novak said. The plan for growing KFC’s profits in China focuses on expanding 24-hour operations, delivery services and the nascent breakfast business in China.

He added that the Pizza Hut business in China had a “breakout year,” as operating profit grew 50 percent for its Pizza Hut Casual Dining chain and the Pizza Hut Home Service delivery brand grew to 120 units. Novak also expressed optimism in Yum’s East Dawning quick-service concept in China, as well as the Little Sheep chain of hot-pot restaurants in which Yum owns a 27-percent stake.

Yum has huge advantages in size in China over competitors — the company has more units in third-tier through sixth-tier cities than McDonald’s has restaurants in the whole country, Novak said. Nevertheless, he added, the company would still challenge itself to drive sales with delivery, 24-hour operations and breakfast expansions.

“Any way you look, our China business had a stellar year,” Novak said. “I couldn’t be more bullish about China. We’ve established category-leading brands … and we’re still in the early innings of growth in China.”

Yum Restaurants International

YRI opened 884 restaurants in more than 75 countries in 2010, Novak said, and major investments are underway for further build outs of India, Russia, France, Germany and Africa. Yum is calling for not only the opening of new locations but also the implementation of new sales-driving initiatives like daypart expansion, breakfast and beverage innovation, and more delivery and 24-hour operations.

“There’s no reason we can’t be a multidaypart, multiprotein company outside the United States,” Novak said. “Our only competitor there is McDonald’s, who has really shown us the way [it can be done].”

In the fourth quarter of 2010, YRI grew its unit count by 6 percent in emerging economies, growing system sales in those countries 9 percent. In more developed nations, YRI increased its unit count from 1 percent to 2 percent, he said, which yielded system sales growth of 4 percent.

“In YRI, we have been operating in a tough macroeconomic environment,” Novak said, “but we’re pleased that we’re making investments in time and effort to develop the future dayparts and menu offerings to leverage our sales assets.”

Yum operates or franchises more than 37,000 restaurants worldwide.

Contact Mark Brandau at [email protected].

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