Thesis on "Yum Brands Had Its Genesis Within Pepsico"

Thesis 5 pages (1576 words) Sources: 2 Style: APA

[EXCERPT] . . . .

Yum Brands had its genesis within PepsiCo, when the soda giant began acquiring restaurant businesses to help diversify its income streams and provide sales support for its core product. Over time, Pepsi acquired a diverse portfolio of fast food chains, most of which make up the core of Yum Brands today. The fast food enterprise was spun off in 1997 as Tricon Global, with the core stable of Taco Bell, KFC and Pizza Hut. Tricon later acquired Long John Silver's and most of A&M (excluding Canada). The company was an early entrant into the Chinese market, in 1987 while still part of Pepsi, and has built up considerable competitive advantage there (MacNealy, 2007). All told, Yum Brands operates in 110 different countries.

The post-Pepsi version of Yum Brands has maintained its former parents' approach to portfolio building. The company is focused on building a diverse range of fast food outlets, but in complementary sectors. With the acquisition of Long John Silver's and A&W, Yum has filled in five of the major categories in the fast food business (Mexican, pizza, burgers, chicken and seafood). There are more categories still available. Yum attempts to leverage its portfolio both directly and indirectly. In many areas, stores are clustered, sometimes within a single building. This allows consumers to have choice at hand, and provides an enticement to the Yum cluster in that non-clustered competitors meet fewer consumer needs than Yum's clusters do. The most common cluster is Taco Bell/KFC. The other way in which the different components of the portfolio complement one another is with respect to market penetration. In China, Yum launched KFC and Pizza Hut simultaneously. Chinese love chicken, so bringing KFC to the Chinese market was a relatively safe bet but the country has no history of pizza consumption. Thus, the move with KFC would help provide cash flows and operating synergies that could assist the buildup of the pizza business.

Yum Brands has generally good financial performance. Last year, the company made $928 million on sales of $11.09 billion. Their revenues and profits have improved each year for the past five years. To facilitate this growth, the company has doubled its long-term debt over the past five years. They are now overleveraged and the company has negative equity. The company is still liquid, however, with a current ratio of 0.7 and interest coverage of 7.9 times. The company turns over its inventory and receivables quickly, albeit below the industry average rate. Indeed, although there is little wrong with Yum's financials except the leverage problem, they underperform the industry average on most measures (MSN Moneycentral, 2009).

Yum's growth prospects are strong. They have a substantial presence in China, one of the world's strongest fast-food growth markets (MacNealy, 2007), and have staked their future on this. In China, they operate three franchises -- KFC, Pizza Hut and East Dawning (CNBC, 2008). The latter is a relatively new venture, focused on Chinese food. Enhancing the growth prospects are the ways in which the different franchises work with one another. East Dawning is publicized to be a sibling of the popular KFC, and it shares the KFC/Pizza Hut distribution system (Ibid). East Dawning is the first of the six units at Yum Brands to have been started from scratch. The others were all acquired over time to form a portfolio.

The different companies within Yum generally share resources. Under Pepsi, such cross-business cooperation was strictly discouraged, but Yum has seen the potential for building operational synergies. All of the companies share purchasing and distribution, allowing for significant economies of scale. In China, the shared distribution chain allows Yum to take its other brands anywhere they have taken KFC, which has the greatest penetration of any fast food company in the country. In North America, the shared purchasing has allowed for greater bulk buying and enhanced leverage over suppliers, allowing Yum to drive down costs.

Yum's vision is one of "runaway" growth (defined as 10% EPS improvement annually). There are four key strategies that will contribute to achieving this vision of the future for Yum. They are building leading brands in every category in China. They have aggressive international expansion plans to build strong brands everywhere. They wish to dramatically improve U.S. brand positions, consistency and returns. Lastly, Yum wishes to drive long-term shareholder and franchisee value (Yum.com, 2009).

Part II: Taco Bell was founded by Glen Bell in San Bernardino, California as a taco/hot dog stand. Various partners were brought on board to facilitate expansion, but Bell sold out to start another chain of his own, Taco Bell, in 1962. The chain began franchising two years later and was an immediate success. By 1975 Bell resigned as Chairman and by 1978 he sold the chain to Pepsi, which at that time already owned Pizza Hut. Pepsi operated Taco Bell independently, as was corporate policy at the time, even while adding KFC and other franchises to its stable. When Tricon Global was spun off, Taco Bell and the other franchises became better integrated.

Taco Bell has a couple of key strengths that drive its business. The company has been able to successfully execute a low-cost strategy, with good supply chain management and strong purchasing capabilities. They also have strong market penetration in the United States (54% market share) and have the highest sales per unit at $1.24 million last year (2008 Yum Brands Annual Report). They are the industry leader in the Mexican fast food segment in the U.S. There are several weaknesses, though. One is the poor reputation Taco Bell has for its food. Their cost-leadership strategy and growing sophistication of palates with respect to Mexican food has contributed to declining interest in the core Taco Bell offerings, meaning that constant new product innovation and heavy advertising are required to push the franchise. This image is hurt further by a handful of health scandals that have hit Taco Bell in recent years, an issue management has treated as isolated. A combination of several factors has lead to another weakness, the uneven sales growth in the U.S. over the past several years. Same store sales rebounded slightly last year after having flatlined for several years prior (Ibid).

One of the main opportunities for Taco Bell is overseas expansion. The company has targeted several countries for expansion, including Spain, the United Arab Emirates, Guatemala Costa Rica and the Philippines. Taco Bell is moving back into Mexico, a market where it failed miserably earlier in the decade. There is tremendous potential to bring the Taco Bell concept to new markets, in large part because of the lack of competition, the existing Yum supply chains and the growing interest in American fast food. Among the threats to Taco Bell are competition in the domestic market and market saturation in the U.S.

Taco Bell makes significant contributions to Yum's portfolio. The company has proven an effective complement to KFC and Pizza Hut in the U.S. market, creating Yum fast food clusters. The company also contributes to the supply chain system. Taco Bell is the largest U.S. business for Yum, although it is weaker in the international markets. To illustrate, there are 5588 Taco Bells in the U.S. And just 245 outside of the U.S. The company's dependence on innovation has produced some winning products that drive business to Taco Bell and by extension to other Yum outlets. Despite Taco Bell's strength in the U.S. market, the brand is not utilized in China, which is the market on which Yum has predicated much of its growth strategy. Indeed, the company is more focused on building KFC and Pizza Hut, with Taco Bell a distant third in relevance to the company's future.

Yum should continue to utilize its current strategy with respect to Taco Bell. Food issues notwithstanding, the company enjoys… READ MORE

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