Yum Brand Spins Off its Chinese Unit

Love Kentucky Fried Chicken? Who doesn’t? How about Pizza Hut? Taco Bell? As you may or may not know, these restaurants are all subsidiaries of Yum! Brands, a multi-national, publicly traded conglomerate that also owns WingStreet and East Dawning.

The food at these chains may not be good for you, but boy does it taste good. People all around the world agree. KFCs for instance, have spread like wildfire over the course of the last half century, and it was even the first American fast food joint to open up in China after the normalization of US-Chinese relations.

In an interesting turn of events, Yum! is parting with its Chinese business in the hopes of helping its foreign and domestic units grow.

Recovering from Setbacks

The decision is largely the result of many stumbling blocks currently impeding growth in China. A combination of food safety issues and increased competition from local restaurants has hit Yum! China hard. There was the scandal involving KFC last year in which one of Yum’s major meat suppliers (Shanghai Husi Food) relabeled expired meat. Once word of the situation got out via a television report, consumers avoided Yum! restaurants like the plague for months.

Currency differences and Chinese economic weaknesses have also had an impact on sales. The difference between a strong dollar and a weak yuan, coupled with the relative low income of the average person in China, put Yum! brands at a major disadvantage to local mom and pop restaurants, as well as local chains that sell at lower prices.

That isn’t to say the Chinese unit is a lost cause. On the contrary, the China division alone accounted for 54 percent of overall operating profit in the last quarter. In addition, the Chinese unit is virtually debt-free. Yum! doesn’t want to get rid of their Chinese operations; they just want them run autonomously by people on the ground in China so that they can grow at their own pace while the more mature American division refocuses its efforts at home.

This is exactly what shareholders have been wanting for quite some time now. After the decision was announced, shares rose 5 percent to $75.22.

Bright Prospects Ahead

The Yum! China unit will be based in Shanghai and be publicly traded. It’ll be a franchisee of the parent Yum! Corporation, paying for the rights to KFC, Taco Bell, and Pizza Hut with a percentage of its sales.

Although Chinese sales currently aren’t where Yum! would like, hopes for the future are high. It foresees growth from its current 6,900 restaurants to 20,000 within the next few years.

The split is in process–scheduled to be finalized by the end of 2016. By the end of 2016, Yum! hopes to have 95 percent of its Chinese restaurants owned and operated by franchisees. The separation will be tax-free for shareholders.

This move by Yum! entails some risk for the Chinese unit while improving the viability of the parent company. If it works out as planned, it can pay off big time.