Yum Brands Inc. the owner of Pizza Hut, KFC, and Taco Bell, announced it will be spinning off its China operations after a series of setbacks in recent years that have hampered the group’s efforts to raise the businesses’ prospects.
Following the split, which is scheduled to be completed by the end of 2016, Yum will trade as two separate companies. The new entity will operate as a franchise and will pay Yum Brands a percentage of its sales for the rights to the brands of KFC, Pizza Hut, and Taco Bell on the Chinese mainland.
The announcement comes days after activist investor and founder and managing partner of Corvex Management LP, Keith Meister, was appointed to Yum’s board. Meister, who disclosed in May of this year that he holds a 5% stake in Yum, has reportedly been calling for such a move by the group. However, Yum has stated that the decision to split off the China business was reached after a “rigorous review of strategic options” that would lead to greater shareholder value.
Yum was the first Western fast food company to gain a place in the Chinese market, launching its KFC brand in the country in 1987. The group has expanded rapidly, and now operates 4,900 KFCs, 1,400 Pizza Huts, 300 Pizza Hut home delivery outlets, and a Chinese hot-pot chain of restaurants called Little Sheep across the country.
On the back of such growth, Yum had grown to be one of China’s most successful foreign companies. But fortunes can change quickly for even the most powerful companies when trying to appeal to consumers and operate in a foreign market. Over the past three years Yum has faced a series of food safety challenges – a highly sensitive subject with Chinese consumers. Yum also was the cause of some of its own misfortune. Its Pizza Hut sales for its latest posted quarter were down after the group launched premium steaks at its restaurants at a time when China’s economy was experiencing a slow-down and consumers were looking for food options that offered more value.
Prior to these setbacks, Yum’s China revenues for 2011 increased by 35% to $5.6 billion, accounting for 44% of the group’s total global revenues, and operating profits increased 20% to $908 million. By 2014 revenues were flat at $6.9 billion and operating profits plunged to 8% to $713 million.
The spin-off of the China business is indicative of Yum’s over-arching move away from owning restaurants to a more ‘asset light’ business model as a means of reducing risk while increasing the reliability of its income. By the end of 2017, Yum plans to have 95% of its restaurants around the world owned and operated by franchisees according to Yum chief executive, Greg Creed.
Under the plan of the separation, the Chinese business will not be saddled with debt, allowing it to invest in its own growth, and Yum states that the separation will generate ‘substantial’ returns to shareholders, “with a balance sheet more consistent with highly leveraged peer restaurant franchise companies.” Moving forward, Yum Brands will continue to be led by Mr. Creed, while the new Chinese entity will be led by Micky Pant, who assumed the role of CEO of Yum China in August.