A Little Sheep Told Me
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last year, Yum! Brands, Inc (NYSE: YUM) decided that it was time to sell Long John Silver's and A&W. The two restaurants had been a part of the Yum portfolio since 2002, but apparently were no longer a part of Yum's long term business plan. What is Yum's goal precisely? In their own words: "Our strategy at Yum! Restaurants International remains to be to drive aggressive international expansion and build strong brands everywhere." (emphasis mine)
Where is Yum's target? Yum's target is everywhere. But I believe that we can analyze this a little further. Recently Yum! was able to buy out a Chinese restaurant called Little Sheep Mongolian Hot Pot. This restaurant is a huge player in a popular Chinese cuisine known as "hot pot." This buyout is significant to me because of the semi-recent sale of LJS and A&W. If Long John's and A&W were sold because they aren't a part of the long term business plan, then logically I can assume that the purchase of Little Sheep does fit in to the plan. But how does it fit?
Lot's of Little Sheep
When I first heard about the purchase of the Little Sheep chain I thought: "How brilliant. Yum can now continue to grow their American food in China, and their Chinese food in America." However, an American growth plan is notably absent in statements from the company. There are a couple of Little Sheep restaurants in the United States, with two more opening recently, but this doesn't seem to be where management is looking for their growth. "...we bought this brand for its potential to join Pizza Hut as the unquestionable leaders in casual dining and the potential to open thousands more restaurants..." (emphasis mine) The context of this statement is in relation to growth in China.
One of the closest competitors to Little Sheep, Xiabu Xiabu Catering, hopes to have over 1,000 locations four years from now. They currently have just north of 200. So Yum isn't the only business optimistic with growth in Chinese hot pot. What I find interesting about this move is that Yum has bought a Chinese restaurant to sell Chinese food in China. The current goal is not to take this business somewhere else.
This is not the first time they have decided to sell Chinese food in China. They have a restaurant chain called East Dawning, which they tried making into a restaurant like a cafeteria before but it didn't pan out. More recently they used what they call their "KFC business model" with East Dawning and their results have improved. They now have over 30 in that chain.
In my mind, this kind of stategy in China is distinct from other businesses' goals. Starbucks (NASDAQ: SBUX) has a presence in China, and Starbucks is pushing growth, but China hasn't become an end-all goal for them. I'm unaware of Starbucks buying out other drink chains in Asia to have another drink to stand alongside coffee and establish themselves as the "unquestionable leader" in casual beverage selection. This strategy that Yum is using in China is more similar to the business model of The CocaCola Company (NYSE: KO). Coke wants to be the main drink company whether they have to create new flavors for a particular country, promote their brand over others, or just simply buy out the competition. Coke is not satisfied with being a contender in the drink market. They want to be the market.
The conclusion that I'm drawing from this is: For Yum to build strong brands everywhere, they first want to dominate China. We all already know how quickly they have been building the Pizza Hut and KFC brands in China. But how many of us knew about the "thousands" of Little Sheep they want to operate? This company is fanatical when it comes to China.
The China Model
It becomes increasingly obvious that Yum is first looking to dominate in China, to then be able to build strong brands everywhere. When talking about the world, management said "The China model is obviously a winner and we want to spread it across the emerging markets." I thought the term "China model" was a little vague. Under investor relations there is no China model document. The reader is left guessing what the China model means. To me, the China model is two-fold:
- Grow like crazy with the brands you have
- Buy/develop new brands to fit locale cuisine
One of the new places that Yum considers a "frontier" market is the entire continent of Africa. Obviously Africa is pretty big and diverse, but Yum is doubling down in the country of South Africa. Recently they bought back around 70 KFC restaurants in the country. The reason? They are committed to growing their brands in the country.
All in all, they are hoping that their restaurant count for the continent will pass 1,000 locations this year. They are in countries like South Africa and Kenya already, but soon hope to be in other countries like Uganda and Tanzania. The stated plan is to grow the brands that they have. But I was in Kampala a few years back and ate at a fried chicken place that was pretty good and pretty popular called Nando's. Could they (or someone else) be a buyout target? You have to wonder.
Yum has specifically talked about KFC in Africa, but that doesn't mean Pizza Hut is off the table. Competitor Domino's Pizza (NYSE: DPZ) is getting in on the African opportunity with their newly opened store in Lagos Nigeria. So far, reception looks like it has been good with pictures showing a packed restaurant. Nigeria is one of the fastest growing economies and populations in the world, so the move by Domino's makes sense. Be sure that you will see a Pizza Hut campaign in the near future, as management has already cited Nigeria's potential.
Crystal balls don't really work, and my time machine is still non functional. But the business plan is to continue aggressive expansion as they have for years to come. But can they keep up this break neck speed? I really like this statement from management: "With less than 2 restaurants per 1 million people in the world's 10 largest emerging markets, we know we have a long, long runway for future growth." No one knows if Yum will keep growing, but clearly there is still room for growth. We also know that they don't plan on slowing down.
Some will point out that it doesn't matter if Yum wants to slow down or not because the Chinese economy is. Heck, management will even point that out. I think the general verdict floating around out there is that Yum will keep growing, but slower. When it comes to investing, people are waiting for a dip in stock price. My thinking is that this company has grown good and is committed to keep growing good. It is clearly a buy and hold opportunity. The dip may not come. The stock isn't outrageously priced right now with a P/E around 20. Now might be as good a time as any to get in.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and Starbucks. Motley Fool newsletter services recommend Starbucks, The Coca-Cola Company, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.