It has been heavily reported that YUM’s most important division, the China division has had some major difficulties in recent times, due to doubts about the quality of its chicken as well as a a more general aviation flu panic. Combined with falling growth in the Chinese economic growth rate sales and profits have been hit hard.
The question is can YUM’s second most profitable division, Yum Restaurants International (YRI), pick up some of the slack? The company has recently published a presentation so I’m going to try and analyse some of the numbers.
YRI is the division that comprises all of YUM’s restaurants outside the USA, China and India. In 2012 it accounted for 30% of YUM’s profits compared to 42% for China and 28% for the USA. It is a massive division with over 14,600 restaurants in over 120 countries serving 60% of the world’s population. They have a mix of company owned and franchised stores, but the majority of stores are franchised, with franchise receipts of around $1bilion expected in 2013. There is a wide geographic split with Asia accounting for 28% of franchise fee’s The Americas and Europe both accounting for 20%, The middle East and Africa accounts for 16% and Australia accounts for 12%.
There are 4 restaurant chains that are operated by YRI, these are; KFC which is active in 114 countries, Pizza Hut Delivery which is active in 64 countries, Pizza Hut Dine-in which is active in 81 countries and Taco Bell which is active in 26 countries.
Despite the big numbers the company believes that there is a massive growth potential. They division operates 11 restaurants per million people in developed countries and just 2 per 1 million in emerging countries. This compares to 58 restaurants per 1 million people in the USA. It is in fact the emerging markets that provide the best returns with 6,906 restaurants in emerging markets generating profit of $355 million. The profits from developed countries were higher at $360 million but they needed 7,720 restaurants to achieve that. Same store sale growth in 2012 was 7% for emerging markets and just 1% for developed markets and average equity margins in emerging markets were 17% compared to 11% for developed markets. All these figures relate to a 16% CAGR in operating profit between 2010 and 2012 of 16% for emerging markets and 5% for developed markets.
The company is using these figures to drive company investment in emerging markets. In 2007 the company operated as equity owner around 2,000 restaurants with 70% in developed countries and 30% in emerging countries. In 2012 the total amount of equity restaurants had been reduced to 1,180, mainly be refranchising in developed markets, however the mix had changed to 60% developed and 40% emerging. Over the next 3-5 years the company aims to grow the amount of equity units with 605in merging and 40% in developed markets.
So how has all the growth translated into profits? Over the last 7 years, despite the global economic conditions the division has achieved a CAGR profit rate of 10%, translating into $715million of profits in 2012. The division should expect at least the same growth rate over the medium term.
Over the longer term the company has the opportunity to substantially grow profits as the markets are nowhere near saturation. In Asia 5 countries (Malaysia, Thailand, Indonesia, Japan and Korea) provide nearly 70% of all Asian profits. This means that there are big countries such as Bangladesh, Pakistan, Vietnam, etc who could step up and grow the business.
In Europe there is only one big profit driver and that is the UK who account for nearly 60% of European profits. Imagine the potential if YUM can replicate the UK performance in Germany, France and other European countries.
In the Americas, Mexico and Canada account for nearly half of all profits and in Africa and the Middle East the same level is achieved by just one country, South Africa
YUM specifically highlighted Africa in their presentation as an example of the growth potential. In 2010 YRI was operating in 10 African countries in 2013 this had been increased to 18 countries, with another 11 countries expected to be added in the short term.
The predicted economic growth on the continent should be a great driver for YRI over the coming years. In 2020 the GDP is expected to £2.6 trillion with a workforce of 504million compared to $1.7 trillion and 382millrion respectively today.
The continent is also home to some massive cities with big consumption. In 2020 New Delhi in India is expected to have consumption of $52 billion. In Africa Cairo is expected to have $72 billion, Johannesburg $57 billion Cape Town and Lagos $35 billion and $34billion respectively.
Over the short term I don’t think YRI can make up the shortfall from the China division, although its performance will certainly be a bonus. However over the longer term this division has the potential to grow significantly and that is one of the reasons I continue to hold YUM shares despite the recent news flow from China.