Yum! Brands Inc., the quick-service franchisor with some of the strongest international footholds of any restaurant company, said its growth abroad has only just begun.
The Louisville, Ky.-based company touted its international businesses in China and other emerging markets on Thursday, while categorizing its U.S market as “disappointing,” especially in its latest second quarter. Results for the June-ended quarter included increased sales and profit abroad, and declining sales and profit domestically.
Yum executives said in a conference call Thursday that foreign-market strength is likely to be more important for the remainder of the year, as results in the United States, especially with key brand Taco Bell, likely won’t turn around significantly until at the earliest the fourth quarter.
“Our second-quarter results demonstrate that our business model is evolving faster than planned,” Yum’s chief financial officer Rick Carucci said. “Not long ago, we thought 75 percent of our operating income would come from China and YRI [Yum Restaurants International] by 2015, and we’re nearly there already.”
Significant headwinds in the United States, stemming mostly from the fallout of a consumer lawsuit against Taco Bell’s marketing practices, sped most of that shift. But the company’s growth prospects, given the potential for continued expansion in China and the emerging economies contained within YRI, like Thailand, Russia and India, are stellar, and may maintain that momentum.
“Our exposure to emerging markets is expected to rise dramatically,” Carucci said. “We’re on the ground floor of growth and making huge gains in growing our businesses.”
United States: ‘All hands on deck’
Both Carucci and Yum Brands chief executive David Novak said a 28-percent decline in second-quarter operating profit in the United States was a major drag on Yum’s net earnings, and that “all hands are on deck” to turn around the results, particularly at Taco Bell.
The 6,000-unit quick-service Mexican chain is Yum’s main driver of profitability in the United States, Novak said, and the company is still bullish on Taco Bell’s growth potential once the brand recovers from the negative attention from the lawsuit.
“We took a big hit with that bogus lawsuit,” Novak said. “In this environment, our heavy user stuck with us, but we lost frequency with our light users. Frankly, the negative sales that resulted from the lawsuit lasted longer than any one of us thought they would.”
High unemployment among Taco Bell’s core demographic of young males, coupled with high gas prices, don’t help matters any either, Novak said, “but we don’t like storytelling here, because stories equal excuses.”
“As far as we’re concerned, the meat issue [from the lawsuit] is over,” he said, “and the economy is just something we have to deal with, and now we have to do a better job building this brand.”
The “significant, breakthrough” product innovation for Taco Bell’s menu will come in 2012, Novak said, but he declined to say what it was. The priority for the rest of 2011 will be stabilizing Taco Bell’s performance to allow for resumed growth next year. He expected same-store sales to improve next quarter from the second quarter’s 5-percent decline, but he anticipates results to still be negative.
Novak added that Pizza Hut “is in pretty good shape,” having maintained for the most part positive sales momentum from 2010’s value-focused sales turnaround. KFC “continues to be a challenge,” also reporting a 5-percent decline in second-quarter same-store sales, Novak said, but Yum is optimistic that the relaunch of Kentucky Grilled Chicken and continued refranchising efforts can gain traction.
China: Breakfast, delivery and 24-hour ops
Yum executives noted that sales drivers cited most often in China — breakfast, delivery and 24-hour operations — are starting to exert leverage on transactions. More than 1,300 of the company’s 3,400 KFC locations in China have 24-hour service, Novak said. Breakfast now accounts for 13 percent of traffic, up from 10 percent in 2010.
“We’re in the very early days, but we’re building a solid foundation for leveraging our assets, creating opportunities for increased sales and even higher average unit volumes,” Novak said.
A 6-renminbi breakfast option and a 6-renminbi snack item, which equate roughly to $1, as well as a value-lunch offering of about 15 renminbi, or around $2, are bolstering KFC’s value proposition as well as its relevance across multiple dayparts, officials said.
“One thing we believe is very strategic for us is to make our brands very affordable on an ongoing, everyday basis,” Novak said. “Depending on which survey you look at, the consuming class in China is going to grow by 200 million to 500 million people, so everyday affordability and access are the name of the game. The China team has done that by focusing on the dayparts.”
Consumer response to the value initiatives has driven such strong incremental traffic that Yum currently has no plans to take near-term price increases beyond the 3-percent hike it enacted early this year, Carucci said. Novak added that the value items, which now account for 10 percent of sales mix in China, had more instances of customers trading down rather than the incremental traffic at breakfast. But the 21-percent increase in traffic for Yum China outpaced the 18-percent same-store sales gain, meaning sales gains are not coming too much at the expense of average check, he said.
“We’re trying to make our brand as compelling, relevant and ubiquitous as we can make it,” Novak said. “You leverage your assets throughout the day and make your products affordable on an everyday basis. We’re doing this in China, and we’re doing this with great margins.”
New unit development key in emerging markets
Carucci and Novak were pleased with the 2-percent gain in same-store sales for YRI, and expressed excitement for opportunities in emerging markets and more developed economies like France and the United Kingdom. New-unit development drove much of YRI’s growth in systemwide sales and operating profit, as YRI opened 142 locations in the second quarter, including 72 units in emerging markets.
Thailand, which accounts for just 2 percent of YRI’s sales, had system sales growth of 21 percent. In India and Russia, which currently produce only 1 percent of YRI’s sales each, system sales rose 44 percent and 19 percent, respectively.
Novak said he was particularly excited by sales results from France and the United Kingdom. System sales rose 33 percent in France in the second quarter, due primarily to improvements in the more than 110 KFC stores, where simplified menus and disciplined cost management drove results, Novak said. Franchisees are set to open 18 more locations of KFC in France this year.
Growth was a more muted 1 percent in the United Kingdom in the quarter, due to a 6-percent increase in system sales for KFC and a 7-percent decline for Pizza Hut. YRI has put new sales drivers in place at Pizza Hut in the United Kingdom, including new personal pizzas and varieties of salads.
“The early results for Pizza Hut in the U.K. are encouraging,” Carucci said. “It’s the right move from a brand perspective. These three salads really modernize the brand, so we’re cautiously optimistic.”
Louisville, Ky.-based Yum operates or franchises 35,753 restaurants worldwide, primarily under the KFC, Pizza Hut and Taco Bell brands.