Yum! was founded in 1997 as Tricon Global Restaurants under Pepsi and spun off in the same year. Headquartered in Kentucky, the company was rebranded as YUM! in 2002. As of 31st December 2019, YUM! “franchises or operates a worldwide system of over 50,000 restaurants in more than 150 countries and territories, primarily under the concepts of KFC, Pizza Hut and Taco Bell”, according to its latest annual report. Let’s get to know a little bit about the business that owns and operates three brands that are well-known among Americans and thousands around the world.
YUM! revenue comes from two primary sources: Company Sales and Franchise Revenue. Company Sales refers to the sale of food items at company-owned restaurants which make up about 2% of YUM’s total restaurants. Franchise revenue includes upfront fees in order to be a franchisee, continuous percentage of monthly revenue (typically around 4-6%) and contribution to advertising. In terms of expenses, YUM! is responsible for all expenses at their own stores. For franchised stores, YUM!’s costs consist of lease, depreciation of the buildings/lands that YUM! owns and leases to franchisees, direct marketing support and others.
Over the past 5 years, the new unit growth rate is pretty steady at the mid single-digit while the franchise segment makes up an increasing part of the whole business
The shift towards franchise is understandable, if you look at the margin of company sales and franchise revenue. In 2019, YUM’s own restaurants’ margin stood at 20% while margin of the franchise segment was almost 93%.
The company sales decreased by over 50% in 2019 compared to 2017 level. Franchise and property revenue continued to the biggest revenue generator for YUM!. The company-wide operating margin stood at a respectable 34% in 2019, even though it is down from 46% in 2017.
As of the end of 2019, there were about 24,000 KFC restaurants under YUM!, of which 83% were outside the US and 99% were operated by franchisees. Revenue has been declining since 2019 due to the drop in company sales and shift towards more profitable franchise model which helped push operating margin
Franchise revenue rose to 56% of KFC’s total revenue in 2019, up from 38% in 2017. While restaurant margin largely remained at 15%, franchise margin rose by 400 basis points in 2019, compared to 2017.
As of the end of 2019, there were around 18,700 Pizza Hut stores, of which 61% were outside the US and 99% were operated by franchisees. Revenue for Pizza Hut has been on the rise since 2017, albeit the fact that its operating margin slightly dipped
While restaurant margin fluctuated as the company didn’t even make money at its own stores in 2018, franchise margin has been on the rise, reaching 93% in 2019. As in the case of KFC, YUM! shifted Pizza Hut’s model towards franchise model which made up 56% of the chain’s total revenue in 2019
Taco Bell has much smaller footprint than its siblings under YUM!. As of the end of 2019, there were around 7,300 units of which 92% were in the US and 94% were operated by franchisees. Revenue has been on the rise while operating margin remains steady at around 30-35%
Franchise revenue made up a smaller chunk of total revenue for Taco Bell than it did for Pizza Hut or KFC. While franchise margin is in the same ballpark as that of the other two brands, restaurant margin is much higher for Taco Bell
The difference in restaurant margin, overall operating margin and the number of stores explained why KFC led the way at YUM! in terms of franchise sale contribution and operating profit contribution while Taco Bell was the leader with regard to restaurant sales
Even though these fast food chains share the same high franchise margin, they differ from one another in terms of restaurant margin. I am curious about what factors result in such a difference. Is it because of the competition in each vertical? Is it due to specifically how each product line is made as in pizzas carry more expenses than chicken wings/fries or Mexican tacos? I’ll try to dig deeper in the near future, but that’s it for today. Hope that it is helpful to you guys. Have a safe and pleasant weekend!