Yum Brands To Separate China Business After Three Decades

Yum's KFC Has Been Trying to Rebound After Food Safety Scandals

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KFC has had two and a half rough years in China.
KFC has had two and a half rough years in China. Credit: Tomohiro Ohsumi/Bloomberg
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Yum Brands, whose restaurants have been selling crispy chicken in Beijing since 1987, is separating its China business from its U.S. operations after pressure from an activist investor.

Yum China will become a franchisee of Yum in the Asian country, with exclusive rights to KFC, Pizza Hut and Taco Bell, according to a statement Tuesday.

The move follows calls from hedge fund manager Keith Meister, a protege of billionaire Carl Icahn, who has said Yum's Asian market could be better served with a more focused business and that the move could boost Yum's value by $7 billion. The fast-food giant added Meister, who owns about 5% of its shares, to the board on Oct. 16.

Sales in China for the Louisville, Kentucky-based owner of KFC and Pizza Hut have been hurt by food safety scandals and increasing competition from local fast-food chains. Mr. Meister, founder of hedge fund Corvex Management, said at an investor conference in May that the risks and opportunities for Yum in China are different than in the U.S., in part because most of its Chinese restaurants are company-owned and not franchised.

Speed Recovery
"Separating the business could help Yum speed up a recovery in same-store sales and profitability in China," said Bloomberg Intelligence retail analyst Thomas Jastrzab. "The new entity could focus all of its efforts on bringing back customers lost because of the supplier-related issues."

Yum was the first international quick-service food chain to enter China, drawing crowds in Bejing's Tiananmen Square for the opening of its first KFC restaurant in the country. Over nearly three decades, the company went on to build a fast-food empire in more than 1,000 cities in the country that generated more than half the company's revenue.

As competition increased from rivals like Taiwanese-owned Ting Hsin International Group's noodle dishes and Guangzhou Real Kungfu Catering Management Co.'s rice bowls, Yum struggled to find menus that catered to local tastes while keeping the signature products of its global brands.

Then, in July last year, Yum was hit by a food scandal after one of its local suppliers was accused of using outdated meat. That vendor, part of Aurora, Illinois-based OSI Group, also supplied McDonald's Corp., Burger King Worldwide Inc., and other fast-food chains. Yum terminated its relationship with OSI globally the same month and apologized to consumers.

It revamped menus to focus on breakfast and healthier foods at KFC to try to bring back consumers. In August, it named Micky Pant as chief executive officer of the China business as part of a management restructuring, replacing Sam Su who had run the unit since 2010.

Mr. Pant will lead the new separated China business, the company said Tuesday, adding it is committed to returning "substantial capital" to shareholders in connection with the split.

Mr. Meister said Tuesday that he's pleased Yum's board agreed with him that Yum is better off as two companies.

"The separation of these two businesses gives shareholders the choice to own a growing annuity-like franchise cash flow stream, as well as the leading restaurant concept in a country with the fastest-growing consumer class," Meister said in an e-mailed statement.

Falling Market Share
Yum's market share has been falling in the past three years, to 31.4 percent in 2014 from 39.9 percent in 2011, while third-place Ting Hsin rose to 8.5 percent from 6.2 percent, data from Euromonitor International showed. McDonald's, in second place, saw its share fall to 15.9 percent last year, from 16.5 percent in 2013, according to the researcher.

Yum reported earlier this month that same-store sales rose 2 percent in China in the third quarter, far below analysts' expectations of 9.6 percent, according to Consensus Metrix.

Separating the China business would allow Yum to be more focused on a country-specific strategy and give it more flexibility in terms of customizing products to the local market, said Jastrzab at Bloomberg Intelligence.

If Yum is successful in tailoring products more to local consumers, it could force competitors like McDonald's "to up their game and build a company-specific strategy," he said.

--Bloomberg News --