The Colonel Leads the Charge in China
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With Yum! Brands (NYSE: YUM) earnings report where they recently informed the world that their business last quarter was not only excellent but also no fluke as they upped their guidance for 2012 to a minimum of 10% income growth over 2011. While U.S. sales and margins continue to improve it is their Asian business that is the real driver of earnings growth. The company has an aggressive growth plan in place not only for its maturing China division but also for India, splitting that market off as a separate division from YRI (Yum Restaurants International).
From their installed base of just 305 stores in India as of December 2011 they are looking to raise that number 1100 by 2015, with KFC leading the way; quintupling in the next 4 years. Adding stores is nice but if they don’t generate the cash then what good are they? Well, that’s what YRI should be saying about Europe, contributing only 6% of YUM’s total income. Asia accounts for 29% of the total operating income for all of YRI and is growing the installed base of that business in some places at more than 20% per year.
So, while U.S. same store sales across their three major brands shrunk overall in 2011 by around 1%, in China they grew at an eye-popping 19% fueled by the introduction of breakfast at KFC and a value lunch at around $2.50 (15 RMB), though that rate is not sustainable and they are looking for sales growth around 5% going forward. They achieved this in the face of hiking prices 2-3% three times in 2011 to offset rising food and labor costs.
The opportunity for YUM in India is a mix of demographics and that there is no credible imitator in the country. While that might say that there isn’t the demand for it, Domino’s Pizza’s (NYSE: DPZ) success in India speaks otherwise. Domino’s has plans to expand from 400 to more than 1000 stores in India by 2015. KFC is uniquely suited to thrive there as there are no religious issues with chicken per se and YUM has already adapted their menus for Hindus and Buddhists in other markets to support a large vegetarian population.
While the opportunity in India is interesting as it represents a near virgin market for them, their existing business in China is scary and so are the growth rates. The bottom line is that China accounts for 42% of operating revenue that looks to grow somewhere north of 10% a year through 2020; adding more than 600 stores for 2012. China represents a total potential market of nearly 600 million people in the next ten years.
Growth plans for Southeast Asia are similarly aggressive with stores in Vietnam doubling by 2015. They do have to compete directly, sometimes side by side, with Lotteria, a Korean fast food joint that specializes in burgers and chicken wings. Vietnam is an interesting market in that delivery isn’t just for pizza, but practically everything, including KFC. Domino’s will do very well there as this is a core strength of theirs. They have just a handful of stores in Ho Chi Minh City since opening their first in December 2010 and are looking to add 20 more over the next few years. They see the same opportunity that YUM does, who has 17 Pizza Huts in Ho Chi Minh City, Hanoi and DaNang. The demographics for Vietnam, like India, are favorable for long-term growth as both countries will have stable populations in the younger age range that YUM’s restaurants appeal to most
YUM is growing in markets where local growth is the strongest and they are adding most, 91% of them, of their emerging market stores as franchises as opposed to owning them. This is part of what is killing their European and U.K. business as they attempt to re-franchise them providing a steady flow of income per store.
It is important to keep in mind that over here many of these U.S. brands are seen as premium products not as cheap or junk. KFC or Pizza Hut is as exotic to a young Vietnamese as a bowl of Pho is to a young, urbane middle-class American going to the new ‘Pan Asian’ restaurant that just opened up.
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