1) Yum Brands is spinning off its highly profitable China division into a separate publicly traded company by the end of 2016 due to concerns about slowing sales growth in China amid its economic struggles.
2) While separating the China business will allow separate management focus, it does not solve the underlying issues causing slowing sales and earnings growth in China.
3) Longer term, Yum investors remain optimistic about opportunities for growth in China as its consuming class is expected to double by 2020, but near term concerns about China's economic health and consumer confidence remain.
- Over the last six months, foreign institutional investors have been the primary drivers of the stock market rally in India, buying shares at every opportunity while local investors have been selling.
- The Employees Provident Fund Organisation announced a 9.5% return for 2010-2011, higher than the previous 8.5% due to a surplus of 1,731.52 crore rupees. Private trusts complained they do not have the same surplus.
- Advance tax payments by the top 100 companies grew 13% to 23,780 crore rupees in September compared to 21,059 crore rupees last year, indicating industry performance in coming months will be positive.
The document analyzes economic indicators to assess the current investment environment and predict a coming recession. It discusses how interest rates, unemployment, yield curves, and the struggling homebuilder market signal a downturn. The manufacturing PMI corresponds to past recessions and declining housing will lower economic growth. While stocks may still outperform for 6-9 months, indicators like inverting yield curves mean bonds will do better than stocks once the recession arrives. Investors should be wary of market timing given the lagging economic data.
Restaurant Monthly Update - January 2017Duff & Phelps
December marked the ninth month out of the past ten with declining sales for the restaurant industry. Both same-store sales and traffic growth deteriorated from November’s results, officially marking 2016 as the worst year of industry performance since 2009. Despite challenges in the sector, private equity investors with significant dry powder and strong, relatively inexpensive credit, will likely continue to fuel investment in innovative and rapidly expanding restaurant concepts.
The document discusses the changing landscape of luxury marketing as brands shift their focus to new consumer groups in emerging economies. It notes that as economies in Europe struggle, luxury brands are directing more of their marketing efforts towards consumers in fast-growing markets like China, India, and Brazil. The article examines how brands are targeting luxury travelers at airports through increased advertising and tailoring their messages to different cultures, especially Chinese consumers. It also looks at how smaller, niche luxury brands may have more opportunities than larger, established names to connect with new luxury shoppers through innovative social media localization strategies.
This document summarizes a presentation given by Yum! Brands to investors and analysts in China. It discusses Yum!'s strategy to build big brands in China through differentiated brand visions, menu designs that appeal broadly, community involvement, and in-store experiences. It highlights how KFC and Pizza Hut are taking different approaches to become leaders in their categories. It also outlines Yum!'s strong support capabilities in logistics, quality systems, innovation, and manufacturing that allow it to operate at scale in China with a focus on food safety.
Yum! Brands aims to be the best restaurant brand in the world and feed the global population. Its growth strategies are to build leading brands in China across all categories, aggressively expand internationally, improve US brand positions and returns, and drive long-term shareholder and franchise value. The first strategy focuses on expanding in China as its middle class grows. The second focuses on international growth through new divisions. The third aims to turnaround US brands through innovation and relations. The fourth centers on optimizing ownership and maintaining social responsibility to boost long-term value.
Yum! Brands operates KFC, Taco Bell, and Pizza Hut restaurants around the world. The document discusses Yum!'s strategies for growth, including reducing exposure to domestic markets and increasing exposure to high-growth emerging markets like China and India. It also notes short-term hurdles in China from a chicken supplier issue but argues Yum! is well positioned for recovery and growth internationally and domestically through new store openings and strategies. Both bullish and bearish views are presented on Yum!'s debt levels and China recovery timeline, but the conclusion is that growth opportunities and current valuation make Yum! an attractive long-term investment.
Presentation on SpaceX given in class EC 728 - Economics of Innovation by my group. It is one of the most fascinating upcoming companies. With an IPO expected in 2013, it will be interesting to see where it heads..
- Over the last six months, foreign institutional investors have been the primary drivers of the stock market rally in India, buying shares at every opportunity while local investors have been selling.
- The Employees Provident Fund Organisation announced a 9.5% return for 2010-2011, higher than the previous 8.5% due to a surplus of 1,731.52 crore rupees. Private trusts complained they do not have the same surplus.
- Advance tax payments by the top 100 companies grew 13% to 23,780 crore rupees in September compared to 21,059 crore rupees last year, indicating industry performance in coming months will be positive.
The document analyzes economic indicators to assess the current investment environment and predict a coming recession. It discusses how interest rates, unemployment, yield curves, and the struggling homebuilder market signal a downturn. The manufacturing PMI corresponds to past recessions and declining housing will lower economic growth. While stocks may still outperform for 6-9 months, indicators like inverting yield curves mean bonds will do better than stocks once the recession arrives. Investors should be wary of market timing given the lagging economic data.
Restaurant Monthly Update - January 2017Duff & Phelps
December marked the ninth month out of the past ten with declining sales for the restaurant industry. Both same-store sales and traffic growth deteriorated from November’s results, officially marking 2016 as the worst year of industry performance since 2009. Despite challenges in the sector, private equity investors with significant dry powder and strong, relatively inexpensive credit, will likely continue to fuel investment in innovative and rapidly expanding restaurant concepts.
The document discusses the changing landscape of luxury marketing as brands shift their focus to new consumer groups in emerging economies. It notes that as economies in Europe struggle, luxury brands are directing more of their marketing efforts towards consumers in fast-growing markets like China, India, and Brazil. The article examines how brands are targeting luxury travelers at airports through increased advertising and tailoring their messages to different cultures, especially Chinese consumers. It also looks at how smaller, niche luxury brands may have more opportunities than larger, established names to connect with new luxury shoppers through innovative social media localization strategies.
This document summarizes a presentation given by Yum! Brands to investors and analysts in China. It discusses Yum!'s strategy to build big brands in China through differentiated brand visions, menu designs that appeal broadly, community involvement, and in-store experiences. It highlights how KFC and Pizza Hut are taking different approaches to become leaders in their categories. It also outlines Yum!'s strong support capabilities in logistics, quality systems, innovation, and manufacturing that allow it to operate at scale in China with a focus on food safety.
Yum! Brands aims to be the best restaurant brand in the world and feed the global population. Its growth strategies are to build leading brands in China across all categories, aggressively expand internationally, improve US brand positions and returns, and drive long-term shareholder and franchise value. The first strategy focuses on expanding in China as its middle class grows. The second focuses on international growth through new divisions. The third aims to turnaround US brands through innovation and relations. The fourth centers on optimizing ownership and maintaining social responsibility to boost long-term value.
Yum! Brands operates KFC, Taco Bell, and Pizza Hut restaurants around the world. The document discusses Yum!'s strategies for growth, including reducing exposure to domestic markets and increasing exposure to high-growth emerging markets like China and India. It also notes short-term hurdles in China from a chicken supplier issue but argues Yum! is well positioned for recovery and growth internationally and domestically through new store openings and strategies. Both bullish and bearish views are presented on Yum!'s debt levels and China recovery timeline, but the conclusion is that growth opportunities and current valuation make Yum! an attractive long-term investment.
Presentation on SpaceX given in class EC 728 - Economics of Innovation by my group. It is one of the most fascinating upcoming companies. With an IPO expected in 2013, it will be interesting to see where it heads..
Opportunity In Chinas Consumer Economy Despite Crisisa Dec08KC Yoon
The document discusses the growth of consumer spending in China and opportunities in the Chinese retail sector. It notes that increasing affluence is turning China into a consumer market, with department stores and supermarkets benefiting from rising disposable incomes. Several large retail companies in China are profiled that have seen significant profit growth in recent years. The analysis indicates the Chinese government is actively promoting policies to further drive domestic consumption and shift the economy away from exports, presenting opportunities for foreign retailers.
After the uncertainty of the Brexit verdict got over, the market rallied in the last week. The market got off on the
wrong foot on the day of the Referendum results and corrected by almost 1000 points. But the market soon
realized that the renewal in trade agreement between UK and Euro is not going to happen anytime soon and it will
take around 1-2 years. India being an emerging nation, the impact of this event is quite limited. After this the
market resumed its upt uptrend. Since budget, the nifty is up by 1000 points, and in percentage terms it has gained
22%. We should remember that it is still 10% off of the it’s all time high, which was achieved in March 2015.
• Despite the fact that the PE multiple of the Indian Markets is 17 – 18 times, the FIIs continue to invest in India on
account of better growth prospects, better earning visibility. India is the only trillion dollar economy which is
growing on 7.5%, which makes it a lucrative long term story.
The document discusses opportunities for investment in China's consumer economy in 2009 amidst the global financial crisis. It predicts that China will successfully transform to a domestic consumption-driven model through government stimulus measures and private sector reforms. Key trends driving future consumer demand include urbanization, growth of the middle class, and increased internet usage. Recommended investment themes focus on emerging niche brands, urban retail and services, direct-to-consumer services, and branded consumer products along the evolving retail value chain.
The Pain of Reform and China's Economic RebirthTom Shaw
This quarterly investment newsletter summarizes recent market movements driven by falling commodity prices, China's economic correction, and US interest rate decisions. It focuses on the timeline of China's stock market decline since reaching a record high in June 2015. The author provides context on China's economic reforms since 1978 and its transition from an export/infrastructure focused economy to one driven by household consumption. Recent volatility is attributed to China's ongoing economic reforms and the immature, retail-investor dominated Chinese stock market, though the author remains optimistic about China's long-term prospects and limited spillover effects on global markets.
This document provides an overview of the current volatile market environment and outlines 10 rules of thumb for navigating periods of increased volatility. It discusses recent declines in major indexes and rise in market volatility. While the authors' base case sees continued slow economic and earnings growth, they note several signs of uncertainty globally. The 10 rules of thumb focus on identifying companies with organic growth opportunities, flexible finances, strong cash flow, and earnings quality to invest successfully through the market cycle.
- McCormick & Company is a large spice, seasoning, and dressing manufacturer with dominant market share and strong competitive position.
- The company has high potential for growth, expanding revenue and new product development continuously.
- McCormick provides reliable bottom-line growth and regular returns to investors through dividends and stock buybacks.
- The economic environment and industry outlook are generally positive, ensuring continued growth opportunities for McCormick.
No bubble trouble; stocks are still reasonably priced. This credit cycle has unique characteristics that continue to make high-yield bonds attractive. Interest-rate volatility poses greater risk than higher rates themselves.
The Southern Oregon University 2015 Economic Forecast (1)Sophia Panacy
This document provides an economic forecast for Southern Oregon University for 2015-2017. It was authored by 13 students and analyzes various sectors of the US economy. The summary is:
1) The real sector, including consumption, investment, housing, and government spending, will see moderate growth over the forecast period supported by low interest rates and an improving job market.
2) Nonresidential investment is expected to rise as businesses invest to meet increasing demand, though energy investment may decline due to lower oil prices.
3) The housing industry recovery will continue slowly due to tight lending standards and low inventory despite low interest rates boosting demand.
- The Total Asset Partners portfolio returned 1.54% for Q3 and 6.27% year-to-date, outperforming fixed income but lagging the S&P 500 while maintaining lower volatility.
- The portfolio remains defensively positioned with 35% in equities, 45% in fixed income, and 19.4% in cash as valuations across asset classes appear expensive and economic growth remains weak.
- Key concerns include declining corporate profits, high debt levels, the risk of higher interest rates, deteriorating high yield credit fundamentals, and expensive equity valuations leaving little room for further expansion.
The document summarizes the findings of a survey of Chief Executive Officers from leading hospitality companies in Britain. Key findings include:
- CEOs expressed optimism about economic growth but concern about declining consumer confidence. Most predicted growth for their own companies.
- Performance varies significantly between London/South East and other parts of the UK, with a widening economic disparity.
- The upcoming UK election is causing uncertainty that could negatively impact business and consumer confidence. CEOs view politicians as disconnected from the industry.
- CEOs are mostly male graduates with operational experience. Looking ahead, cross-functional experience and soft skills will be more important for future leaders.
- Geopolitical and security issues, as well as talent
- The document summarizes the findings of a survey of CEOs from Britain's leading hospitality companies conducted by Heidrick & Struggles in association with the British Hospitality Association.
- The CEOs expressed optimism about the economic outlook but concern about declining consumer confidence. While most felt their own companies would see moderate or significant growth, they worried that consumers may become more cautious spenders.
- The CEOs also viewed politicians as disconnected from the sector and felt that uncertainty around the upcoming national election in 2015 could negatively impact businesses.
- The document summarizes the findings of a survey of CEOs from Britain's leading hospitality companies conducted by Heidrick & Struggles in association with the British Hospitality Association.
- The CEOs expressed optimism about the economic outlook but concern about declining consumer confidence. While most felt their own companies would see moderate or significant growth, they worried that consumers may become more cautious spenders.
- The CEOs also viewed politicians as disconnected from the hospitality sector and felt election uncertainty could negatively impact businesses this year. A majority saw regional economic disparities widening between London and other parts of the UK.
The document summarizes a report on the consumer foodservice industry in China. It finds that the industry saw dynamic growth supported by rising incomes and urbanization. Young consumers were particularly important as they were attracted to western brands and concepts. While independents dominated the market, leading chains like Yum! Restaurants benefited from early investment. The report forecasts continued strong growth for chains as consumers' incomes rise further.
This document is a newsletter providing an overview of global news and financial market performance for the week. It includes the following:
- The top 3 performing and underperforming countries/regions for the week were Brazil, America, Russia and Japan respectively.
- News items on Samsung launching a mobile wallet in China, Hillary Clinton criticizing Donald Trump's NATO plans, and the Panama Papers leak revealing tax haven use.
- Performance summaries of various stock markets and fund investments.
- An article on the 7 stages of retirement and upcoming pension changes in the UK.
The document discusses the state of the US economy and debt financing markets for middle market companies. It notes that while the economic recovery remains fragile, modest growth in areas like manufacturing, personal income and expenditures, coupled with continued federal stimulus, should allow the economy to continue growing without a second recession. However, unemployment will remain high as productivity gains allow more output with fewer workers. Debt markets have also seen renewed activity, with increased volumes in both the leveraged loan and high yield bond markets.
This article talks about Management strategies for economic and market recovery. It has been co- authored by Dr. Uday Salunkhe, Director of the prestigious Welingkar Institute of Management and Research.
The document discusses recent measures by the Reserve Bank of India (RBI) to develop the corporate bond market in India. Key points:
- RBI announced measures including allowing corporate bonds in liquidity operations, higher ceilings on credit enhancements, and direct access for foreign investors to bond platforms.
- These measures address some supply-side issues but more work is needed on the demand side to develop participation from long-term institutional investors across credit ratings.
- For the bond market to be truly vibrant, depth across credit ratings is needed along with liquidity, creditor protection, and low information asymmetry. The measures are a step forward but full development remains a work in progress.
Deloitte Report "Global Powers of Retail 2014"Oliver Grave
This document provides an overview and analysis of the global economic outlook and its implications for retailers. It discusses economic growth forecasts and challenges facing major economies like China, the United States, and Europe. For China, it notes a slowing economy and issues like debt from shadow banking that could impact sustained growth. The US is expected to see better growth in 2014 than 2013, assuming the Federal Reserve's tapering of monetary policy proceeds smoothly. Political uncertainties pose risks to predictions.
pl_najwieksze_sieci_handlowe_Global_Powers_of_ _Retailing_2014Blossom Out
This document provides an overview and analysis of the global economic outlook and its implications for retailers. It discusses near-term growth prospects for major economies like China, the United States, and Europe. For China, growth around 7-8% is expected but debt issues pose risks. The US is strengthening but Federal Reserve policy normalization presents uncertainty. Political decisions could significantly impact forecasts. Retailers face both opportunities and challenges depending on how individual countries and regions perform.
Opportunity In Chinas Consumer Economy Despite Crisisa Dec08KC Yoon
The document discusses the growth of consumer spending in China and opportunities in the Chinese retail sector. It notes that increasing affluence is turning China into a consumer market, with department stores and supermarkets benefiting from rising disposable incomes. Several large retail companies in China are profiled that have seen significant profit growth in recent years. The analysis indicates the Chinese government is actively promoting policies to further drive domestic consumption and shift the economy away from exports, presenting opportunities for foreign retailers.
After the uncertainty of the Brexit verdict got over, the market rallied in the last week. The market got off on the
wrong foot on the day of the Referendum results and corrected by almost 1000 points. But the market soon
realized that the renewal in trade agreement between UK and Euro is not going to happen anytime soon and it will
take around 1-2 years. India being an emerging nation, the impact of this event is quite limited. After this the
market resumed its upt uptrend. Since budget, the nifty is up by 1000 points, and in percentage terms it has gained
22%. We should remember that it is still 10% off of the it’s all time high, which was achieved in March 2015.
• Despite the fact that the PE multiple of the Indian Markets is 17 – 18 times, the FIIs continue to invest in India on
account of better growth prospects, better earning visibility. India is the only trillion dollar economy which is
growing on 7.5%, which makes it a lucrative long term story.
The document discusses opportunities for investment in China's consumer economy in 2009 amidst the global financial crisis. It predicts that China will successfully transform to a domestic consumption-driven model through government stimulus measures and private sector reforms. Key trends driving future consumer demand include urbanization, growth of the middle class, and increased internet usage. Recommended investment themes focus on emerging niche brands, urban retail and services, direct-to-consumer services, and branded consumer products along the evolving retail value chain.
The Pain of Reform and China's Economic RebirthTom Shaw
This quarterly investment newsletter summarizes recent market movements driven by falling commodity prices, China's economic correction, and US interest rate decisions. It focuses on the timeline of China's stock market decline since reaching a record high in June 2015. The author provides context on China's economic reforms since 1978 and its transition from an export/infrastructure focused economy to one driven by household consumption. Recent volatility is attributed to China's ongoing economic reforms and the immature, retail-investor dominated Chinese stock market, though the author remains optimistic about China's long-term prospects and limited spillover effects on global markets.
This document provides an overview of the current volatile market environment and outlines 10 rules of thumb for navigating periods of increased volatility. It discusses recent declines in major indexes and rise in market volatility. While the authors' base case sees continued slow economic and earnings growth, they note several signs of uncertainty globally. The 10 rules of thumb focus on identifying companies with organic growth opportunities, flexible finances, strong cash flow, and earnings quality to invest successfully through the market cycle.
- McCormick & Company is a large spice, seasoning, and dressing manufacturer with dominant market share and strong competitive position.
- The company has high potential for growth, expanding revenue and new product development continuously.
- McCormick provides reliable bottom-line growth and regular returns to investors through dividends and stock buybacks.
- The economic environment and industry outlook are generally positive, ensuring continued growth opportunities for McCormick.
No bubble trouble; stocks are still reasonably priced. This credit cycle has unique characteristics that continue to make high-yield bonds attractive. Interest-rate volatility poses greater risk than higher rates themselves.
The Southern Oregon University 2015 Economic Forecast (1)Sophia Panacy
This document provides an economic forecast for Southern Oregon University for 2015-2017. It was authored by 13 students and analyzes various sectors of the US economy. The summary is:
1) The real sector, including consumption, investment, housing, and government spending, will see moderate growth over the forecast period supported by low interest rates and an improving job market.
2) Nonresidential investment is expected to rise as businesses invest to meet increasing demand, though energy investment may decline due to lower oil prices.
3) The housing industry recovery will continue slowly due to tight lending standards and low inventory despite low interest rates boosting demand.
- The Total Asset Partners portfolio returned 1.54% for Q3 and 6.27% year-to-date, outperforming fixed income but lagging the S&P 500 while maintaining lower volatility.
- The portfolio remains defensively positioned with 35% in equities, 45% in fixed income, and 19.4% in cash as valuations across asset classes appear expensive and economic growth remains weak.
- Key concerns include declining corporate profits, high debt levels, the risk of higher interest rates, deteriorating high yield credit fundamentals, and expensive equity valuations leaving little room for further expansion.
The document summarizes the findings of a survey of Chief Executive Officers from leading hospitality companies in Britain. Key findings include:
- CEOs expressed optimism about economic growth but concern about declining consumer confidence. Most predicted growth for their own companies.
- Performance varies significantly between London/South East and other parts of the UK, with a widening economic disparity.
- The upcoming UK election is causing uncertainty that could negatively impact business and consumer confidence. CEOs view politicians as disconnected from the industry.
- CEOs are mostly male graduates with operational experience. Looking ahead, cross-functional experience and soft skills will be more important for future leaders.
- Geopolitical and security issues, as well as talent
- The document summarizes the findings of a survey of CEOs from Britain's leading hospitality companies conducted by Heidrick & Struggles in association with the British Hospitality Association.
- The CEOs expressed optimism about the economic outlook but concern about declining consumer confidence. While most felt their own companies would see moderate or significant growth, they worried that consumers may become more cautious spenders.
- The CEOs also viewed politicians as disconnected from the sector and felt that uncertainty around the upcoming national election in 2015 could negatively impact businesses.
- The document summarizes the findings of a survey of CEOs from Britain's leading hospitality companies conducted by Heidrick & Struggles in association with the British Hospitality Association.
- The CEOs expressed optimism about the economic outlook but concern about declining consumer confidence. While most felt their own companies would see moderate or significant growth, they worried that consumers may become more cautious spenders.
- The CEOs also viewed politicians as disconnected from the hospitality sector and felt election uncertainty could negatively impact businesses this year. A majority saw regional economic disparities widening between London and other parts of the UK.
The document summarizes a report on the consumer foodservice industry in China. It finds that the industry saw dynamic growth supported by rising incomes and urbanization. Young consumers were particularly important as they were attracted to western brands and concepts. While independents dominated the market, leading chains like Yum! Restaurants benefited from early investment. The report forecasts continued strong growth for chains as consumers' incomes rise further.
This document is a newsletter providing an overview of global news and financial market performance for the week. It includes the following:
- The top 3 performing and underperforming countries/regions for the week were Brazil, America, Russia and Japan respectively.
- News items on Samsung launching a mobile wallet in China, Hillary Clinton criticizing Donald Trump's NATO plans, and the Panama Papers leak revealing tax haven use.
- Performance summaries of various stock markets and fund investments.
- An article on the 7 stages of retirement and upcoming pension changes in the UK.
The document discusses the state of the US economy and debt financing markets for middle market companies. It notes that while the economic recovery remains fragile, modest growth in areas like manufacturing, personal income and expenditures, coupled with continued federal stimulus, should allow the economy to continue growing without a second recession. However, unemployment will remain high as productivity gains allow more output with fewer workers. Debt markets have also seen renewed activity, with increased volumes in both the leveraged loan and high yield bond markets.
This article talks about Management strategies for economic and market recovery. It has been co- authored by Dr. Uday Salunkhe, Director of the prestigious Welingkar Institute of Management and Research.
The document discusses recent measures by the Reserve Bank of India (RBI) to develop the corporate bond market in India. Key points:
- RBI announced measures including allowing corporate bonds in liquidity operations, higher ceilings on credit enhancements, and direct access for foreign investors to bond platforms.
- These measures address some supply-side issues but more work is needed on the demand side to develop participation from long-term institutional investors across credit ratings.
- For the bond market to be truly vibrant, depth across credit ratings is needed along with liquidity, creditor protection, and low information asymmetry. The measures are a step forward but full development remains a work in progress.
Deloitte Report "Global Powers of Retail 2014"Oliver Grave
This document provides an overview and analysis of the global economic outlook and its implications for retailers. It discusses economic growth forecasts and challenges facing major economies like China, the United States, and Europe. For China, it notes a slowing economy and issues like debt from shadow banking that could impact sustained growth. The US is expected to see better growth in 2014 than 2013, assuming the Federal Reserve's tapering of monetary policy proceeds smoothly. Political uncertainties pose risks to predictions.
pl_najwieksze_sieci_handlowe_Global_Powers_of_ _Retailing_2014Blossom Out
This document provides an overview and analysis of the global economic outlook and its implications for retailers. It discusses near-term growth prospects for major economies like China, the United States, and Europe. For China, growth around 7-8% is expected but debt issues pose risks. The US is strengthening but Federal Reserve policy normalization presents uncertainty. Political decisions could significantly impact forecasts. Retailers face both opportunities and challenges depending on how individual countries and regions perform.
1. Why Investors Are Skeptical About Yum
Brands Stock
Yum's China division accounts for half of its revenue, but will be spun off by the
end of 2016.
"Eating out in China is still a relative luxury," one analyst says, "so it's important that the economy shows a little bit of
improvement from where it is now, and that the consumer remains confident."
By Christine Giordano Oct. 26, 2015 | 10:21 a.m. EDT
Last week's announcement that Yum Brands would spin off its lucrative China division into
a separate publicly traded company in 2016 is raising doubts among investors about the
short- and medium-term benefits of holding YUM stock (ticker: YUM), and in investing in the
new company amid Beijing's economic struggles.
"It does not solve the issues that they're having in China, dealing with slowing sales and
slowing earnings growth there," says Jack Russo, senior consumer analyst for St. Louis-
based Edward D. Jones & Co., which has a "hold" recommendation on the stock.
2. "But what it does do, it does separate the two businesses. It will allow the management
teams of each business to focus more intently on their individual business units. And it
separates a high-growth business – a potentially high-growth business in China – from a
lower-growth business, which is what you'll see in the non-China segment," he says.
YUM stock's earnings woes. YUM stock, already wounded by a worse-than-expected
earnings report, continued to tumble following the Oct. 20 announced spinoff of the
company's China operation, which accounts for half of the company's revenue and a third of
its operating revenue. Yum owns KFC, Taco Bell and Pizza Hut restaurants.
Moody's Investors Service downgraded Yum's senior unsecured notes from Baa3 to Ba1,
citing the company's announcement that it is "committed to returning substantial capital to
shareholders in conjunction with the separation."
This will likely make its interest costs of future financings go up and will also put them in a
highly leveraged category, which could unnerve investors. To gain a higher rating, Yum
would need to show "a demonstrated and sustained improvement in same-store sales,
specifically at KFC China, while showing continued improvement in operating performance
in the U.S. and international divisions," according to Moody's.
Yum, which opened its first Chinese KFC in 1987, once saw its revenue in the country
rising as high as 35 percent in 2011. But since 2012, Yum in China faced a series of public
relations nightmares, mostly about chicken.
It started when CCTV reported a supplier was treating chickens with excess antibiotics and
growth hormones. In 2014, the avian flu scared customers away, and last summer, a
supplier was accused of selling expired meat to Yum and other chains, leading to
consecutive and unpredictable disappointments: a fourth-quarter revenue decline of 16
percent in 2014 and a 12 percent drop in the first quarter of this year.
"Obviously, the more of those you have, it pings your brand. And I think the challenge in
operating in China is you're going to have those issues," says Jerry Braakman, chief
investment officer of First American Trust in Santa Ana, California.
In August, Yum replaced its head of China operations with Mickey Pant, a former chief
executive of KFC with a strong marketing background. By the third quarter, the company
reported year-over-year growth, but in the single digits – less than its projection of 10
percent growth. It took hits throughout September with same-store sales in China that were
weaker than expected.
On Oct. 7, Yum disappointed Wall Street by reporting same-store growth of 2 percent when
investors were expecting 9.6 percent growth. The stock tumbled by more than 16 percent
3. as investors fled, setting the stage for Yum's board of directors to add activist investor Keith
Meister, the founder of Corvex Management, on Oct. 15.
Meister had been urging the spinoff of the China division for months and has a 5 percent
stake in Yum, valued around $1.5 billion.
The China division. Yum operates 6,900 restaurants in China, including 4,900 KFC
eateries that maintain a special menu that includes hoisin sauce for the Chinese palate.
"I think the KFC brand has really hit on because the Chinese diet consists highly of
chicken," Braakman says. "Their menu in China is completely different than it is in the U.S.
And so, it uses more local ingredients, has local products," that appeal to the Chinese
patrons.
As the Chinese population becomes more accustomed to eating cheese, Pizza Hut has
also become a presence with 1,400 restaurants.
Taco Bell, Yum's strongest domestic brand, has no presence in China but has an exclusive
option to open in the country. Yum says it is on pace to open 700 new restaurants in China
this year, and plans to eventually have 20,000 locations.
Although the Chinese economy is faltering, Yum expects its consuming class to double
from 300 million in 2012 to more than 600 million by 2020, "providing a strong tail wind to
the growth of Yum China."
The transition to make Yum China a separate, publicly traded franchise is to be completed
by the end of 2016, with Yum's India business merging with the global entity. The
immediate response to the announcement was a 1.8 percent hike in the share price of YUM
stock, although shares returned to their downward trajectory by the end of the week.
Yum's long-term prospects. In a statement, Meister says the spinoff will help establish the
right corporate and capital structure to maximize long-term shareholder value.
Much will depend on how freely Chinese consumers spend their money. Typically, the
Chinese have a saver mentality. "What we're seeing in China is that the consumer trends
are decelerating. So it's not to say that China isn't growing, but there's really just a new
paradigm in China, where we can no longer expect double-digit growth year after year,"
says Andrew Daguay, senior economist at Prevedere, a data analytics company in
Columbus, Ohio.
4. The Organisation for Economic Co-Operation and Development predicts a 6.7 percent
growth rate through 2016, which looks relatively paltry compared with the 12 percent growth
in years past, but stunning compared with the 3 percent growth U.S. rate. "Those expecting
China to be the goose with the golden egg – that's no longer the case from a global
economic perspective," Daguay says.
Some indicators beyond GDP include the sales of movie tickets, cars, mobile phones and
homes, which show about 4 percent growth, according to the New York research firm
Sanford Bernstein.
"Eating out in China is still a relative luxury," Russo says, "so it's important that the
economy shows a little bit of improvement from where it is now, and that the consumer
remains confident. And I think right now that's being challenged a little bit."
Longer-term Yum investors tend to like the long-term urbanization story and the unfolding of
China's development. But shorter-term investors are keeping a close eye on the export
economy, Braakman says.
"There's issues in there: in the transparency of their economy; in the balance sheets of their
banks; they've had a huge investment in their infrastructure. So all these are headwinds
that are propped up, obviously by a strong export economy and the positive current trade
balance. But if those things ever get challenged, then you could have not just a short, but a
medium-term challenge to a company like Yum," he says.
"But over the long term, past three to five years, I think they're going to continue to benefit
from that demographic shift as they continue to urbanize," he adds.
In China, it might be beneficial for KFC to renew its focus on healthier food.
"In terms of the fast-food business in general, I think there is a general tendency towards
more healthy food, a healthy diet. That's becoming a new trend, so that they probably have
to come up with some new menus," says Chen Zhao, co-director of global macro research
at Brandywine Global.
And in the U.S., eyes will be on how well Yum reinvigorates its Taco Bell brand and how
strongly it competes with Chipotle Mexican Grill (CMG), in much the same way that
McDonald's Corp. (MCD) competes with Shake Shack (SHAK).