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Yum! Brands Symbol: YUM Jiawei Chen & Tianran Chen Revised by: Ryan Comisky March 31 2009

Yum! Brands Symbol: YUM Jiawei Chen & Tianran Chen Revised by: Ryan Comisky March 31 2009. Agenda. Industry overview Company overview Competitors Thesis points 1. Global 2. Management 3. Cash flow advantage Financial Data Risk factors. Industry overview.

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Yum! Brands Symbol: YUM Jiawei Chen & Tianran Chen Revised by: Ryan Comisky March 31 2009

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  1. Yum! BrandsSymbol: YUMJiawei Chen & Tianran ChenRevised by: Ryan ComiskyMarch 31 2009

  2. Agenda • Industry overview • Company overview • Competitors • Thesis points 1. Global 2. Management 3. Cash flow advantage • Financial Data • Risk factors

  3. Industry overview • U.S: 945,000 restaurants $552 billion in annual sales.  • Quick Service Restaurants (QSR) consist of 72.8 % of the whole industry revenues. • Advantage of economies of scalelow priced value meals • Fierce competition

  4. Company Overview • World’s largest quick service restaurant (“QSR”) company based on number of system units • 1997 spin-off of PepsiCo forms Tricon • 2002 changed its name from TRICON Global Restaurants, Inc. to YUM! Brands, Inc.

  5. Five concepts KFC: chicken. Pizza Hut : quick-service pizza Taco Bell: Mexican-style food LJS: seafood categories A&W • Business structure * Company-operating units * Independent franchisees or licensees

  6. Units Distribution • 3 segments: 1. United States - 20,000 units 2. YUM Restaurants International (YRI) – 13,000 units 3. China – 3,600 units • More than 36,300 units in more than 110 countries and territories

  7. Competitor • McDonald’s • Domino’s Pizza • Burger King

  8. Thesis points 1) Global distribution systemwhich has great potential 2) Strong management team and energetic company culture 3) Strong cash flow

  9. Thesis I: Strong overseas growth potential world-wide revenue distribution(unit: million)

  10. The China Division and YRI have been experiencing dramatic growth and now represent nearly 60% of the Company’s operating profits

  11. Global Development---Rapid Growth in China • Mainland China -rapidly growing economy -population of 1.3 billion • KFC -Leading QSR 2500 units in 500 cities -Yum! opens nearly one new KFC every day in mainland China (Q4 2008) • Pizza Hut -Western-style casual dining restaurants -400in 100 cities -the first restaurant chain to introduce pizza

  12. Long Term GOAL at least20,000units in mainland China.

  13. SO, why is Yum! successful? Competitive advantages: • 1. Food Quality and Flavor! • 2. Product Strategy: localization -Foreign brand with Chinese Character -Promote new product every months -Combine Chinese dining tradition

  14. 3. Marketing the Brand - Make restaurant a social communication place - Modern lifestyle behind the food

  15. Not a Coincidence!! Survey Q: Why do you go to KFC or Pizza Hut? A: Food Flavor and Quality: 85% Eating Environment: 43.6% Convenience: 38.2% Price: 25.5% Follow trend or advertisement: 0%

  16. Manager telephone interview Q: In your opinion, what is the main reason that Yum! Brands can be successful in China? A: 1. Quality 2. Food Flavor 3. Service: targeted to different age populations - Birthday party - Student discount

  17. Can the success continue in the future?-Yes! • 1. Low individual visiting frequency for existing customers consistent and stable consumption pattern Survey Q: How often do you eat in these restaurants? KFC Occasionally: 57.4% Pizza Hut Occasionally: 83.3%

  18. 2. Large Potential Market for Lower Income Population Survey Q: How much do you spend on average every time you go to KFC? A: 15-25 RMB—2.2-3.6 Dollar 56% 25-50 RMB—3.6-7.1 Dollar 36.4% Pizza Hut? 30-50 RMB—4.3-7.1 Dollar 34.5% 50-80 RMB—7.2-11.4 Dollar 34.5% Survey Q: If there is an economic crisis, how will it influence your consumption in these restaurant? No Change: 55.6% Both decrease: 27.8% Decrease in Pizza Hut, no change in KFC: 13%

  19. What’s more…….New Brand, New Product • Pizza Hut Home Service (pizza delivery) East Dawning (Chinese food) • 20% shares of Little Sheep Company, a Chinese Hotpot system restaurant

  20. Joining Hotpot

  21. II. Overseas--International • YRI Revenues: $3.0 billion Operating Profit: $528 million (2008) • 9 straight years of opening over 700 new restaurants.   • Company expects to continue to experience strong growth in new markets, including India, France, and Russia.  

  22. Increase of Percentage In Franchise Fees Around The Globe (in 2008) • Asia (excluding China) 19% • Latin America 12% • Middle East Northern America 32% • South Africa 32%

  23. India • Interview Indian students at UVa - Develop in recent years - Localization of food, offer vegetarian options - Welcomed by young people - Large growing potential

  24. USA • Highly competitive marketplace • Slower profit growth • But continues to produce strong cash flows.

  25. Furthermore . . . • Multibranding, should strengthen volume sales • Refranchising company-owned restaurants. By the end of 2010, management hopes to own less than 10% of its U.S. restaurants (down from 20%)More cash flow

  26. Thesis II. Management • Core CHAMPS – Cleanliness, Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service • Various senior operators visit the company’s restaurants from time to time to help ensure adherence to system standards and mentor restaurant team members.

  27. VAR about Management • “Challenging” • “Systematic” • “Like a family”

  28. Thesis III: Strong Cash Flows • In 2009, it is important to note that management does not need to access the credit markets to finance their company • Strong cash flow and balance sheet provide them with the flexibility to successfully navigate through these challenging financial times.

  29. 3 Year Cash Flow Breakdown

  30. Financial Data • Last Trade:27.65 • Market Cap(bil) 12.68B • P/E 14.5 • EPS (ttm):1.96 • P/S Ratio 1.09 • 5-Y Avg Ann Return 6.91% • Annual Dividend $0.76 • Dividend Yield 2.6% • Beta 1.09

  31. the cumulative total return

  32. 2008 Highlights · Worldwide system sales growth of 7% - same store sales growth of 3%+ international development of 1,495 new units · Worldwide operating profit growth of 8% • An industry leader with return on invested capital (ROIC) of 20%.

  33. Earnings per share (EPS) for the previous four quarters: $1.90 • Worldwide Operating Profit growth: 11% • PE ratio: 14 • Stock price declines compared to 2008 • 2006 has the same stock price

  34. Risk Factors • Operating results are closely tied to the success of the Concepts’ franchisees. • Nature and volatility of the foreign currency markets • Influence by commodity price

  35. Risk, but also OPPORTUNITY! • Foreign currency factor can be a great advantage for Yum! Brands • US Dollar depreciation relative to RMB  more of an opportunity than risk

  36. Questions?

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