Yum's China unit eyes vast stores expansion after US spinoff

[CHICAGO] Yum! Brands Inc, the US fast-food giant that's spinning off its China unit, plans to add more outlets with the likelihood of tripling its presence to about 22,000 stores in Asia's biggest economy.

Yum China already has 7,300 restaurants in the country - five per million people - and has the potential to triple that in the long term, it said in a statement on Tuesday. By year's end, it will have 7,500 locations comprising the KFC, Pizza Hut, Little Sheep and East Dawning chains, it said.

The long-term expansion will give Yum China, which is set to become the country's largest independent restaurant company after the separation, about 15 stores per million persons in China. That compares with about 57 Yum restaurants per million persons in the US

The move to separate the China unit, which will trade independently on the New York stock exchange from Nov 1, came after Keith Meister's Corvex Management pressured Yum to hive off the business to boost shareholder value. Chief executive officer Greg Creed said the fast-food giant will have "higher growth and less risk" after the separation.

"At separation, we will be operating a highly cash-generative business, with no external debt and ample cash on hand," said Yum China CEO Micky Pant in the statement. "This will enable us to invest in new restaurants, digital engagement and our delivery network, providing job opportunities to thousands more people across the country."

Yum China will have over US$900 million cash on hand as an independent company, it said. Mr Pant said at Yum's annual investor conference in New York on Tuesday it could make strategic acquisitions, but has no specific plans to do so right now.

The terms of Yum China's separation allow for takeovers, as long as they don't compete directly with its former parent company. Mr Pant also said that Yum China could double the number of locations for its Little Sheep chain to 500 in about five years and may expand the brand outside of China.

With the restaurants in China paying to license Yum's brands, the company still will benefit from the growth potential of the world's largest consumer market, Mr Creed said at the conference. Yet having the locations in a separate company will allow Yum to reduce costs and return more capital to shareholders, he said.

The comments signal that Yum - the owner of the KFC, Pizza Hut and Taco Bell restaurant chains - is on track to deliver on the promises it made when it announced the China split a year ago.

Yum shares rose 1 per cent to US$88.25 by the close of trading in New York, paring gains after jumping as much as 3.8 per cent, the most since July on an intraday basis. The S&P 500 Index fell 1.2 per cent. Yum's stock has advanced 21 per cent so far this year, ahead of the index's 4.5 per cent rise.

Yum said Tuesday in a statement that it plans to have at least 98 per cent of its locations run by franchisees by its fiscal year ending in 2018. That's up from 77 per cent now and a projected 93 per cent by the time of the China separation.

Handing more of its restaurants over to franchisees is also another way for Yum to trim its costs, as it plans to reduce capital spending to US$100 million in fiscal 2019 from about US$500 million after the China separation.

General and administrative expenses will fall by US$300 million. That target will be achieved partly through job cuts, including the elimination of 600 corporate positions in the US and internationally by the end of the year, Yum said in an e-mailed statement. An additional 1,500 corporate jobs will be eliminated by the end of 2018.

Many of the cuts will come through refranchising, attrition and voluntary retirement, with a "small percentage" due to involuntary firings, the company said.

The company plans to return about US$13.5 billion in cash, including dividends, to shareholders between the fourth quarter of 2015 and 2019.

The China split also will allow management to turn its attention to the US business, which faces the challenges of sluggish spending by consumers and increased competition with fast-food rivals.

Pizza Hut is grappling with an escalating battle of discounts and promotions with Domino's Pizza Inc and Papa John's International Inc. Third-quarter sales at Pizza Hut chain dropped 1 per cent, trailing estimates.

"Making it easier to get a pizza is really critically important to us going forward," Mr Creed said.

Taco Bell, meanwhile, has found success by focusing on enticing diners with indulgent fare, such as beefy crunch burritos, along with a revamped US$1 menu. The chain also is making a bigger push to open locations abroad and recently just added its first Brazil location. Same-store sales rose 3 per cent in the most recent quarter at the chain.

Yum had struggled to regain footing in China in recent years after a former supplier was accused of selling expired food. KFC and Pizza Hut also are facing more local competition and a tougher economy where consumers are less willing to spend. Last week, the company said the dispute over the South China Sea hurt last quarter's sales.

Yum China will trade in New York under the YUMC ticker. The company will give one share of Yum China for each share of Yum Brands held.

While the separation will allow Yum to focus more on its domestic operations - where it's trying to revamp brands and boost sales - Mr Creed said Yum will remain involved with the business.

"We intend to continue that collaboration for the days, weeks and months ahead," Mr Creed said.

BLOOMBERG