Yum Brands Financial Statement Analysis

Pages: 8 (2843 words) Published: October 17, 2012
Yum Brands Incorporated is the world’s largest fast-food, or quick-service restaurant (QSR), company in terms of restaurants, which numbered over 37,000 at the end of 2010. It currently operates five restaurant chains, but by the end of 2011, that number will decrease to three: KFC, Pizza Hut, and Taco Bell. The remaining two chains, A&W and Long John Silver’s, will be sold in the 4th quarter of 2011 to companies formed by their franchise holders. As of November, 2011, Yum is in the process of purchasing a Chinese hot pot chain, Little Sheep. It has received government approval and is awaiting shareholder approval.

Yum started as the restaurant division of food and beverage giant PepsiCo. In 1997, facing increasing competitive pressures, PepsiCo decided to focus its business strategy on its core beverage and snacks portfolio, spinning off the restaurant division as Tricon Global Restaurants. In 2002, Tricon changed its name to Yum Brands and added A&W and Long John Silver’s to the portfolio.

Business Model
Yum is organized as a cooperative multidivisional corporation. There are currently six operating segments: KFC (U.S.), Pizza Hut (U.S.), Taco Bell (U.S.), Long John Silver’s / A&W (U.S.), Yum Restaurants International (YRI) and Yum Restaurants China. On , Yum announced that it would be creating a new segment, Yum Restaurants India. For financial reporting purposes, Yum consolidates the four segments into a single reporting segment. As a result, data used for forecasting revenues will include the Long John Silver’s / A&W segment, although Yum has stated that the sale would not have a material effect on earnings or cash flow.

Yum operates under the related constrained organizational strategy. Although the operating divisions are separate, a centralized corporate office controls centralized strategic planning, develops an operational framework for all the divisions, and marketing. This company structure easily allows joint products to be developed between divisions, such as the multi-concept stores, which feature menus from two or more of the chains within a single store. Another benefit they enjoy is economies of scope. Although the chains are not able to fully leverage economies of scale to reduce costs due to dissimilar product offerings, economies of scope allow the sharing of competencies, such as training and supply networks, between the divisions. This centralized framework is allowing Yum to expand rapidly in markets where it does not already have a presence.

Yum operates the majority of its restaurants as franchises. Restaurants are owned and operated by investors, who pay franchise fees and royalties to Yum in exchange for the rights to operate under the brand and other assistance. The Yum franchise model is more decentralized than other QSR restaurants, allowing franchisees to own the restaurant property and building and having more control over business decisions. Within the franchisees are limited to one third party supplier for their food, packaging and equipment. Internationally, there are a higher number of suppliers, but some are controlled by Yum, particularly in , where Yum owns the entire distribution system.

Competitive rivalry is high within the QSR industry, not just for market share, but also for restaurant locations, employees, commodities, and qualified franchise owners. Each Yum restaurant competes with locally-owned restaurants, QSR restaurants, and even with non-QSR restaurants. It can be difficult to identify Yum Brand’s major competitors, but for financial comparison, it is usually matched with QSR companies of a similar size, such as McDonald’s and Doctor’s Associates (Subway). Major competitors within the Yum divisions include Domino’s and Papa John’s (Pizza Hut); AFC Enterprises (KFC), and Chipotle (Taco Bell).

Despite heavy competition, the Yum chains are all market leaders within their individual categories. As of the...
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