Yum China has ‘huge potential’
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Yum China is set to exploit “huge potential” after its spin-off from its US parent, says Neil Saunders, CEO of Conlumino.
Commenting on the parent company’s latest results, the US-based retail commentator said while the China division once again delivered “an anemic performance” with total system sales declining by 3 per cent over the prior year, the best is yet to come.
Revenue at both Pizza Hut and KFC fell on a same-restaurant basis.
“This means that in the year to date, in real terms the China operation has posted no real sales growth. Fortunately, changes to value-added tax in the country allowed Yum! to ease up operating profits across the quarter,” said Saunders.
“The position of China as a business which has huge potential once it gets through the current patch of slow growth, largely justifies its imminent spin-off into a completely separate operation. The divorce from the rest of the Yum! operation will allow both sides to focus more on their respective priorities and opportunities.”
He said the overall global result for Yum! Brands suggest the company is making good headway in an increasingly challenging market.
“However, the reality is far more mixed – mostly because Yum!’s growth figures are flattered by the fact the company strips out exchange rate fluctuations. When these are put back in, total revenue experienced a shrink of 3 per cent over the prior year – a far less impressive outcome.
““This means that in the year to date, in real terms the China operation has posted no real sales growth.”
“In terms of the core business, the main focus needs to be Pizza Hut which has become something of a problem child for Yum! Over the quarter system sales shrank by 2 per cent in real terms, underpinned by a 1 per cent decline in same-restaurant sales. While there are some markets in which the brand is performing well, these continues to be overshadowed by the US which accounts for the majority of Pizza Hut’s revenue.”
Saunders said that while admittedly the overall casual dining market, in which Pizza Hut loosely falls, saw customer traffic and spend decline over the third quarter.
“However, our data also show that Pizza Hut is losing customer share to delivery services like Papa John’s and Domino’s. A defection to cheaper fast-food alternatives, especially among younger families, has also been unhelpful. This is an uncomfortable position and underlines the fact that Pizza Hut still has much work to do in terms of reinvigorating its brand.”
Taco Bell, meanwhile, had a better quarter with a 5 per cent system-sales growth and 3 per cent same-restaurant growth.
“While Taco Bell has benefitted from challenges at Chipotle, in our view most of the success is down to a change in marketing which is now more relevant to the younger millennial audience. Menu simplification and focus on popular lines has also helped to drive growth. We think these steps should be seen as part of a longer term upswing in the brand’s fortune.”
Saunders said that while KFC had a much better quarter than the previous one, especially in the US, Conlumino still harbors concerns about the brand’s longer term growth prospects as younger upstarts like Chick-Fil-A or Popeyes Louisiana Kitchen continue to gain traction.
“As such, we see KFC’s latest upswing as part of a more turbulent longer term picture.”
Questions & Answers
Q.Why is the spin-off of Yum China considered a positive development despite its recent performance?
Why is the spin-off of Yum China considered a positive development despite its recent performance?
The spin-off will allow both the China operation and the parent company to focus on their individual priorities. The commentator believes China has huge potential once it moves past its current slow growth period.
Q.How did Yum's overall global revenue performance compare to its reported growth figures?
How did Yum's overall global revenue performance compare to its reported growth figures?
Yum's reported growth figures were flattered by excluding exchange rate fluctuations. When these were included, total revenue actually shrank by 3 per cent over the prior year, making the outcome less impressive.
Q.What are the main issues contributing to Pizza Hut's struggles?
What are the main issues contributing to Pizza Hut's struggles?
Pizza Hut is losing customer share to delivery services like Papa John's and Domino's, and customers are defecting to cheaper fast-food alternatives, especially among younger families. The US market, which accounts for most revenue, is also struggling.
Q.What factors contributed to Taco Bell's improved performance in the last quarter?
What factors contributed to Taco Bell's improved performance in the last quarter?
Taco Bell benefited from challenges faced by Chipotle, but most of its success is attributed to a more relevant marketing strategy targeting younger millennials. Menu simplification and focus on popular lines also helped drive growth.
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