Global Equities

Stock story: Yum! Brands

The force behind the KFC, Pizza Hut and Taco Bell fast-food juggernauts.

Stock story: Yum! Brands

April 2019

In the 1930s, Harland Sanders started cooking for travellers at his service station and motel in Kentucky. In 2017, the company that the honorary Colonel founded sent a chicken sandwich into space to promote KFC outlets, which already attract eight million people a day in the US. In 1958, two brothers borrowed US$600 from their mother and opened a Pizza Hut in Kansas. The chain is now the official pizza sponsor of the NFL and on Super Bowl day this year it sold enough pizzas in the US to cover 41,000 gridiron pitches. In 1962, a Taco Bell opened in California. In 2018, the Mexican-style chain, which publicised its arrival in London by projecting its bell logo over a scaffolded Big Ben and sending out chimes for the under-repair clock, sold 53 million servings of ‘nacho fries’ in a three-month promotion.

Behind the success of the world’s most famous quick-service chicken restaurant, the world’s biggest pizza chain and the US’s leading Mexican-style franchise sits Yum! Brands. In 2018, the Kentucky-based business generated US$5.7 billion in revenue, mainly from licence fees, from the 48,000 or so KFC, Pizza Hut and Taco Bell restaurants that it franchises, licenses and operates around the world. (These outlets sold about US$49 billion worth of chicken, pizza, tacos and other eatables last year.)

The variety of foods Yum! Brands offers across its three chains mean its outlets can appeal to more customers in different segments than can most single-concept operators – Pizza Hut caters more for restaurant outings while the others are more geared towards takeaway. Another reason for the Yum! Brands success is that 20,500 of its outlets are in fast-growing emerging markets. This number includes 8,200 licensed outlets in China, where ‘finger lickin’ good’ translates into ‘eat your fingers off’.

Bold expansion plans and skill at managing franchisees on top of Yum! Brands’s marketable and valued brands and worldwide reach mean the company is likely to hold a dominant position in the global fast-food market for years to come. That’s what makes it such a promising investment.

Yum! Brands has challenges, of course. Fast food is a competitive industry and Yum! Brands has rivals in every segment. Pizza Hut sales are lagging due to competition from Domino’s and Papa John’s. It’s not easy overseeing such a large business of franchisees either. KFC outlets embarrassingly ran out of chickens in the UK in 2018 when the Yum! Brands supply system failed. The occasional food poisoning issue erupts. A long-lasting challenge that shows no sign of abating is the trend towards healthier eating, which prompted the name change from Kentucky Fried Chicken to KFC as long ago as 1991. Yum! Brands holds a fair bit of debt too.

But Yum! Brands is a solid business with formidable growth opportunities and one that is always striving to appeal to customers and keep franchisees happy. Satisfied patrons and profitable franchisees make for robust returns for the company’s investors. The shares of Yum! Brands have set fresh record highs so far in 2019.   

Running franchisees

KFC, Pizza Hut and Taco Bell came to be grouped in the same business because soft-drinks giant Pepsi wanted to reduce its reliance on beverages. Accordingly, Pepsi bought Pizza Hut in 1977, Taco Bell the next year and KFC in 1986. In 1997, Pepsi sold (via a listing) its restaurant franchises that went under the name of Tricon before the switch to Yum! Brands in 2002.

Yum! Brands, which has 98% of outlets operating under franchise, sees much growth in the decades ahead. The company’s long-term plan is to have 126,000 KFC, Pizza Hut and Taco Bell outlets globally, which would be nearly triple today’s number. (The targeted spilt is 60,000 KFC, 48,000 Pizza Hut and 18,000 Taco Bell outlets compared with 23,000, 18,000 and 7,000 outlets respectively today.)

Under a capital-light franchise model that reduces risks associated with higher labour and commodity prices, the success of Yum! Brands is based on sales growth rather than the earnings of outlets. Franchisees can be individual stores or small and larger groups of stores such as Yum China, a US-listed business spun out of Yum! Brands in 2016.

Franchisees rule over their restaurants. They get to set prices, hire staff and manage the supply chain. If successful, franchise operators tend to add more outlets, which boosts the revenue of Yum! Brands.

As the franchiser, the role of Yum! Brands consists of day-to-day tasks such as checking on the franchisees. Yum! Brands, for instance, ensures that the décor in the restaurants, the speed of service and the quality of the food meet the required standards.

More-overarching roles include that Yum! supervises menu changes such as Taco Bell’s expansion of vegetarian. Others are that Yum! Brands negotiates certain agreements on behalf of franchisees. An example of this includes the recently announced partnership with GrubHub to deliver KFC and Taco Bell in the US. A prominent role is that Yum! Brands in 2018 spent US$131 million to support the brands – the stores paid for another US$1 billion in marketing. Some of what Yum! Brands has spent on marketing in recent years has been directed at the bizarre. KFC, for instance, promotes faux bearskin floor rugs featuring Colonel Sanders’s face and markets fire logs that burn with the aroma of KFC fried chicken.

Yum! Brands has a long-term sales growth target of 7% p.a. for systemwide sales, a measure that includes store growth and same-store-sales growth. That’s achievable given Yum! Brands’s three-pronged strategy to mass market well-known brands enjoyed by millions the world over each day.

Sources: Company filings and website and Bloomberg.


Important Information: This material has been produced by Magellan Asset Management Limited trading as MFG Asset Management (‘MFG Asset Management’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision.

This material may include data, research and other information from third party sources. MFG Asset Management makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MFG Asset Management. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.
Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of MFG Asset Management.

How to invest

  • Magellan offers two market-leading strategies, global equities and global listed infrastructure. Find out how easy it is to invest in the world’s best companies, as chosen by Magellan’s experts.

  • Global Equity Products

    You buy from the world’s best companies, so why not invest in them? Magellan offers a range of highly-rated global equity funds, containing some the world’s best companies that we believe are positioned to benefit from long-term investment tailwinds.

    Invest in global equities
  • Global listed Infrastructure products

    Infrastructure: Supporting you every minute of every day. Our range of top-rated global listed infrastructure funds are positioned to generate inflation-protected, stable yet solid returns.

    Invest in global infrastructure
  • Magellan Sustainable Fund

    Invest in 20 to 50 high quality global companies within a framework that considers ESG risks. The Magellan Sustainable Fund aims to achieve attractive risk-adjusted returns and preserve capital in adverse markets.

    Find out more
  • MFG Core Series

    Our range of lower-cost global equity funds, designed to offer investors a unique and compelling combination of active portfolio construction and ongoing systematic portfolio management.

    Find out More
  • Magellan FuturePayTM

    Investing for income and growth, particularly in retirement. Magellan FuturePay is an innovative new fund that aims to deliver a predictable monthly income that grows with inflation, capital growth with a focus on downside protection, a reserving strategy and on-going income support, and daily access to capital.

    Invest in FuturePay