Yum! Brands Inc.
Proposed by: Matthew DeSantis
Current Price: $51.65
Target Price: $73.95
Stop Loss: $41.85
52- Week Range: $35.04 – $50.29 Market Cap.: 14.59 Billion
Buy 33 shares at current market price
Approx. 34,000 x 5% = $1,700
$51.65 x 33 = 1704.45
YUM! Brands, Inc. and Subsidiaries comprise the worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver's and A&W All-American Food Restaurants and
is the world's largest quick service restaurant ("QSR") company based on the number of
system units. Long John Silver’s and A&W were added when YUM acquired Yorkshire
Global Restaurants, Inc. on May 7, 2002. With 12,998 international units, YUM is the
second largest QSR company outside the U.S. YUM became an independent, publicly-
owned company on October 6, 1997 via a tax-free distribution of our Common Stock to
the shareholders of our former parent, PepsiCo, Inc.
Through its Concepts, YUM develops, operates, franchises and licenses a system of both traditional and non-traditional QSR restaurants. Traditional units feature dine-in,
carryout and, in some instances, drive-thru or delivery services. Non-traditional units,
which are typically licensed outlets, include express units and kiosks which have a more
limited menu and operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a full-scale
traditional outlet would not be practical or efficient.
Individual Restaurant Profiles (www.Yum.com)
A&W All American Food, based in Louisville, Kentucky, began in 1919 when
Roy Allen mixed up a batch of creamy root beer and sold the first frosty mug of his
delightful beverage for one nickel. He took on a partner, Frank Wright, and the two
named the brew after themselves: A&W Root Beer. After all this time, A&W Restaurants
still serve the proprietary beverage in more than 500 locations (most in high-pedestrian
areas) in the U.S.A. As well as for the delicious root beer floats, the brand has become
well known for serving all-American hot dogs and pure-beef hamburgers, and it is the
longest running quick-service franchise chain in the U.S.A.
KFC, based in Louisville, Kentucky, is the world's most popular chicken
restaurant chain specializing in Original Recipe?, Extra Crispy? and Colonel's Crispy
Strips? chicken with homestyle sides and freshly made chicken sandwiches. Since its
founding by Colonel Harland Sanders in 1952, KFC has been serving delicious, already-
prepared complete family meals at affordable prices. KFC has more than 11,000 outlets
in 85 countries and territories around the world, serving some 8 million customers each
Long John Silver's relocated to Louisville, Kentucky, in 2003. It is the largest
quick-service seafood chain in the U.S.A. The company's first restaurant opened in 1969
as Long John Silver's Fish 'n' Chips when consumers were demanding quick-service
seafood. As the concept has grown, the menu has evolved to meet the desire of
consumers looking for more variety and great taste. Long John Silver's Restaurants serve
45 million pounds of fish and 15 million pounds of chicken annually. Each week, about
3.8 million guests visit more than 1,200 worldwide restaurants per week.
Pizza Hut, based in Dallas, Texas, is the world's largest pizza restaurant company,
with nearly 8,000 restaurants and delivery units in the United States and more than 4,100
units in 85 countries. The company is the recognized leader of the $25 billion pizza
category. Menu items include popular choices such as Hand-Tossed, Thin 'n Crispy ?,
Pan, Stuffed Crusts, and the complete Lover's? line. New pizzas that have also become
favorites include The Big New Yorker, The Edge?, The Insider, and Twisted Crust. In
1958, Pizza Hut opened in Wichita, Kansas, and began selling what are still considered "the best pizzas under one roof."
Taco Bell, based in Irvine, California, is the largest Mexican-style quick-service
restaurant company in the world, a status quickly reached after the brand's 1962
beginning. Currently, more than 55 million people visit Taco Bell restaurants in any
given week in the U.S.A., and they purchase 4.5 million tacos, as well other popular
menu items such as burritos, nachos, chalupas, and gorditas, each day in our restaurants.
Additionally, half the U.S. population sees a Taco Bell commercial at least once a week,
which generates significant brand recognition.
The retail food industry, in which the Company competes, is made up of supermarkets, super-centers, warehouse stores, convenience stores, coffee shops, snack
bars, delicatessens and restaurants (including the QSR segment), and is intensely
competitive with respect to food quality, price, service, convenience, location and
concept. The industry is often affected by changes in consumer tastes; national, regional
or local economic conditions; currency fluctuations; demographic trends; traffic patterns;
the type, number and location of competing food retailers and products; and disposable
purchasing power. Each of the Concepts competes with international, national and
regional restaurant chains as well as locally owned restaurants, not only for customers,
but also for management and hourly personnel, suitable real estate sites and qualified
Porter’s Competitive Advantage Paradigm Analysis
Entry of New Competitors –
New companies trying to enter into a similar type of venture to that of YUM! Brands Incorporated will find it somewhat difficult. This is due to the saturation of the
restaurant market and barriers of entry, such as economies of scale, cost of entry capital,
time it takes to develop a clientele, already established supply chains.
The Threat of Substitutes –
As I stated above the restaurant sector is nearly completely saturated in the US, and is rather hard to just start a restaurant chain. The real threat exists in those companies
that are already large, in the same market, and have the resources and experience similar
to that of YUM!. It is important for corporations in the food industry to apply fair pricing,
new innovative products, and establish for themselves a strong brand identity; all of
which Yum! Brands Incorporated has done.
The Bargaining Power of Suppliers –
With YUM!, their suppliers have some bargaining power, since beef, chicken, vegetables, and soda (Pepsi) are the primary components in their most profitable
products. These products have somewhat variable prices and are subject to mild
fluctuations based on market demand and location.
Rivalry Among Existing Competitors –
The restaurant industry is one of the most competitive of any market, because it is so saturated and competition is so fierce. It is absolutely necessary for a new and
developing restaurant chain to establish for itself brand identity. Market advertising and
promotion is essential, to actually gaining profits.
Firm Positioning Analysis
The soft US economy has resulted in a nearly zero growth environment for the
restaurant industry. Yet, Yum! has actively overcome this by vigorously expanding into
foreign countries in the past five years. Nearly one third of its profits now come from
Cost Leadership - Yum! possesses very well-developed supply lines and uses relatively cheap ingredients that have many substitutes. Additionally, their suppliers are very
interchangeable. This flexibility in supply chains, variety of foods being served, and the
ease at which their foods can be produced gives them a competitive edge over their
Differentiation – Yum! is the first restaurant to offer more than one of it’s concepts at
one location (multi-branding). An example is the KFC and Taco Bell in Olean, and the
A&W and Long John Silvers in DuBois, PA. This increases revenues because a group of
people with varying tastes is more likely to eat there, than say, a McDonalds because they
provide something for a wider variety of preferences.
Focus – Yum! strives to provide its customers with quality, good-tasting food at highly competitive prices. Its typical customers are middle-class families looking for affordable
meals on the go. As stated above, multi-branding appeals to many groups of people who
would otherwise dine somewhere else.
– The Company’s continuous expansion into Asia and other regions.
– Well-developed restaurant brands and exceptionally efficient and ever-improving
– The idea of multi-branding which causes one establishment to appeal to varying
– Strong advertising campaigns.
– Constant updating of menus and “specials” to appeal to current trends and fads.
– Some brands (concepts) may weigh down profits of top performing ones.
– Sensitivity to market fluctuations.
– International expansion and growth.
– In domestic markets, turning one-brand units into multi-brand units to appeal to
more customers, which will cut into competitors’ revenues.
– Improvement of operations.
– The highly competitive nature of the restaurant industry.
– Entry of competitors into foreign markets first.
– Menu appeal.
How Yum Can Use Its Strengths and Opportunities to Minimize Threats and
With Yum!’s multi-branding strategy it can minimize the threat of competitors
gaining market share in domestic markets by bringing in customers with varying tastes.
Also, its aggressive expansion and high level of approval in China and other nations will
serve to buffer against competitors seizing market demand before they do. In addition,
their strides to improve their operations can, and will, influence customers to dine in their
restaurants as opposed to those of their competitors. When improved operations are
combined with their extensive advertising and constantly updated menu, Yum! can
expect substantial growth over the next few years.
Direct Competitor Comparison
AFC Enterprises, Inc. (AFC) develops, operates and franchises quick service
restaurants, bakeries and cafes (generally referred to as QSR's) in two distinct business
segments: chicken and bakery. The chicken segment operates and franchises under the
trade names Popeye’s Chicken & Biscuits and Church's Chicken. The bakery segment
operates and franchises under the trade name Cinnabon and franchises cafes under the
trade name Seattle's Best Coffee. As of December 28, 2003, AFC's brands operated or
franchised 4,091 QSR’s in 46 states, the District of Columbia, Puerto Rico and 36 foreign
countries. In 2003, franchise revenues represented approximately 15.6% of AFC's total
franchise revenues. In November 2004, the Company sold its Cinnabon subsidiary to
Focus Brands Inc., an affiliate of Roark Capital Group. (Finance.Yahoo.com)
McDonald's Corporation operates and franchises McDonald's restaurants in the
foodservice industry. These restaurants serve a varied yet limited, value-priced menu in
more than 100 countries around the world. The Company also operates Boston Market
and Chipotle Mexican Grill, and has a minority ownership interest in the United
Kingdom-based Pret A Manger. In December 2003, the Company sold its Donatos
Pizzeria business. All restaurants are operated either by the Company, by independent
entrepreneurs under the terms of franchise arrangements (franchisees/licensees) or by
affiliates operating under license agreements. When granting franchises and forming joint
ventures, the Company is selective and generally is not in the practice of franchising to,
or partnering with, investor groups or passive investors. (Finance.Yahoo.com)
Wendy's International, Inc. is primarily engaged in the business of operating,
developing and franchising a system of distinctive quick-service and fast-casual
restaurants. As of December 28, 2003, there were 6,481 Wendy's restaurants (Wendy's)
in operation in the United States and in 21 other countries and territories. Of these
restaurants, 1,465 were operated by the Company and 5,016 by its franchisees. As of
December 28, 2003, the Company and its franchisees operated 2,527 Tim Horton’s
(Hortons) restaurants with 2,343 restaurants in Canada and 184 restaurants in the United
States. Of these restaurants open, for the fiscal year ended December 28, 2003, only 57
were Company operated. In addition, the Company and its franchisees operated 283 Baja
Fresh restaurants in 25 states, of which 132 were company-operated restaurants and 151
franchise restaurants. (Finance.Yahoo.com)
Sonic Corp. operates and franchises a chain of drive-in restaurants (Sonic Drive-
Ins) in the United States. During the fiscal year ended August 31, 2004 (fiscal 2004), the
Company had 2,885 Sonic Drive-Ins in operation, consisting of 539 Partner Drive-Ins
and 2,346 Franchise Drive-Ins, principally in the southern two-thirds of the United States.
Partner Drive-Ins are those Sonic Drive-Ins owned and operated by either a limited
liability company or a general partnership. It owns a majority interest, typically at least
60%, and the supervisor and manager of the drive-in own a minority interest in each
Partner Drive-In limited liability company or general partnership. Franchise Drive-Ins are
owned and operated by its franchisees. (Finance.Yahoo.com)
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