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2 Big Questions for the Yum! China Spin-Off (i.e., KFC, Pizza Hut) Going Forward

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So Yum! China has been spun-off. A reasonable move that gave them increased focus. It also gave some activist hedge funds a nice return. But there are now some important challenges going forward. Personally, I have three questions for the spun-off company:

#1 – Who is the new Sam Su?

Yum’s success in China was not because of its franchise. KFC is certainly a great restaurant but there are hundreds of franchises. That doesn’t explain KFC’s stratospheric success in China. I argue their success was overwhelmingly because 1) they got to China early and 2) they had particularly great management.

That great management was former China CEO Sam Su (and his team). He is a native of Taiwan and was a veteran of Proctor & Gamble Taiwan prior. He also came to KFC China early in his career and committed for the long-term.

So my question is who the new Sam Su? Who is the China expert who will revitalize and grow this company for the next 20 years? You want long-term top-tier management.

#2 – Are they going to franchise the China outlets? How many?

Most of the China outlets are owned. Franchising new outlets would accelerate growth. While Yum’s +7,000 China outlets is a lot, it is not overwhelming for China. You could have a lot more. Franchising would get you there faster.

But franchising decreases operational control. That has big implications in general. And this is a particular concern in a country rife with food safety issues.

Another idea is to just franchise the existing outlets. That would really move the needle financially. It would free up a lot of capital, get the employees off the payroll and spike the return on equity.

Note: This is exactly what 3G Capital has done since acquiring Burger King. They shifted the existing units to franchises and have more than doubled their earnings in a few years. However, I believe the China Burger King franchise is still under a master franchise agreement with Cartesian Capital in New York. So this is mostly a non-China story.

Anyways, I wouldn’t be surprised if the activists bring up management and franchising repeatedly.

Thanks for reading. jeff

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Thanks for reading. My writing (and speaking) are on how rising Chinese consumers are changing the world. (#ConsumerChina). This also includes work on:

  • China 2025″ – what a region transformed by Chinese consumers, companies and capital is going to look like. (#China2025)

Photo by David Bote Estrada, Creative Commons license link here.

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