Monday 22 July 2019

Growth may make taking slice of Pizza Hut owner a good investment

 

China is the largest food-service market in the world — and KFC has been able to capitalise. Photo: Bloomberg
China is the largest food-service market in the world — and KFC has been able to capitalise. Photo: Bloomberg

Aidan Donnelly

One amusing aspect when it comes to talking to people about different shares is when you mention a company name and the person tells you they have never heard of it and don't have a clue what it does. In some cases, like this one, my response is to tell them that I can guarantee that not only do they know the company, they have probably used its service or bought its product at some point in their lives.

The company, Yum! Brands, has been operating in one form or another since the 1950s.

It used to be part of the United States drinks giant PepsiCo until, in 1997, they decided to separate out what was then called the Tricon Global Restaurant business from its main drinks business. On the basis that name is everything, the new management decided to opt for a slightly catchier title and changed the name to Yum! Brands.

Yum! Brands is one of the largest quick-service restaurant groups globally with a portfolio of brands that include KFC, Taco Bell, and Pizza Hut. The company follows what is called an 'asset-light' model in that it owns very few of the restaurants that carry its brand names. Instead, its model is to seek franchise partners that will operate the restaurants in different regions around the world. In some cases, it might be just a single restaurant that a franchisee owns, but more and more, we are seeing larger groups look to operate multiple sites in their region.

Over the last few years, developing a wider global footprint for KFC and Pizza Hut brands has been a major opportunity for the company, especially within emerging markets. A healthy pace of new unit openings across these markets was driven by the positive long-term demographic trends and low existing penetration levels. But when it came to growing, it wasn't just about opening new stores - particularly in more developed markets. Through a combination of modest price increases, menu innovations, operational and technological investments, and effective marketing, the company has seen the sales at its existing sites also grow.

Given the demands that such growth places on a company, in October 2016 the management spun out the Chinese operations into a standalone company called Yum! China. After the separation from Yum! Brands, Yum China pays a licence fee to its former parent for the right to sub-license KFC and Pizza Hut intellectual property in China.

The restaurant industry in China has experienced rapid growth in the past decade and has become the largest food-service market in the world. The market is highly fragmented, with fast-food chain restaurants only a small part of the market. Population numbers in even the tertiary cities in China are significant and therefore could support the opening of several new sites for both KFC and Pizza Hut. With consumer incomes growing and consumer tastes become more westernised, it is not difficult to see a long runway for growth for the company into the future.

In more developed markets, the company has begun to focus on increasing its penetration in the delivery market with menu innovations and using better insulated pouches to preserve the product quality - and ultimately leading to higher average bill sizes.

If you are looking at the restaurant industry, Yum! Brands could make a good investment.

Aidan Donnelly is head of equities in Davy Private Clients. For disclosures, visit www.davy.ie/AidanDonnelly

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