Yum! 2007 Annual Report |
| June 04 2009 | |
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In fact, as we move into our second decade as a public company, we have never been more certain and more excited about the growth we have within our grasp in all corners of the world. I know you’d also agree there’s nothing like a track record of success to give you the confidence you can keep on winning. That’s why I’m especially pleased to report we achieved 15% Earnings Per Share (EPS) growth for 2007, powered by simply sensational growth in China, continued profitable international expansion, and strong, stable U.S. cash generation. That’s the sixth straight year we’ve exceeded our +10% annual EPS target, proving the underlying power of our global portfolio of leading brands enables us to deliver consistent double-digit EPS growth. In so doing, we grew worldwide same store sales 3% and strengthened our claim as the number one retail developer of new units outside the United States by opening 1,358 stores, the seventh straight year we’ve opened up more than 1,000 With such powerful results, we generated record cash from operations of over $1.5 billion and returned an all time high of nearly $1.7 billion to our shareholders through share repurchases and dividends. Additionally, we announced in October our plan to substantially increase the amount of share buybacks over the next two years, repurchasing a total of up to $4 billion of the company’s outstanding common stock. Given this overall performance, our share price climbed over 30% for the full year on top of 25% growth in 2006. We are especially gratified that our average annual total return to shareholders is 18% since our spin-off. But of course, all of this is yesterday’s newspaper. Continuing to win big in this tough, competitive environment means we must attack our opportunities with even more purpose and urgency. Let me assure you we are doing just that. We have four powerful growth opportunities that we believe make us not only “Not Your Ordinary Restaurant Company,” but the most uniquely positioned retailer in the world. Here’s how we’re winning big: The numbers tell the story: KFC has 2,140 quick-service restaurants in mainland China, more than McDonald’s, our nearest competitor. Pizza Hut has 351 casual dining restaurants with no other significant Western casual dining chain in mainland China. Like I reported last year, the key to our success is that we have an outstanding local team that has worked together for over ten years to build these brands the right way from scratch. Our China leaders started with the vision to become not only the best restaurant company in China, but the best restaurant company in the entire world. There’s no doubt in my mind we are doing just that. Just ask any analyst, investor or consumer who has visited our Chinese restaurants, and I’m betting they will tell you we are building best in class brands and operations. What’s more, we are highly profitable, generating $375 million in operating That’s an amazing 30% growth in 2007 and a five year average annual growth rate of over 25%. China is our highest returning international business with a cash payback on investments of less than two years which is why we are investing our own capital to be primarily company owned and operated. As we have built the business, we’ve put in place a world class infrastructure to give us a long-term competitive advantage. We uniquely own our own food distribution system that has allowed us to expand KFC into 406 cities and make Pizza Hut available in 77 cities. We have one of the largest real estate and construction teams of any retailer in the world that opened 471 traditional restaurants in 2007 as we continue to grow our people capability ahead of the business by recruiting and retaining talent with highly sought after, well-paying jobs. I always liken our China opportunity to the days when Colonel Sanders, Glen Bell, Dan Carney and Ray Kroc started KFC, Taco Bell, Pizza Hut and McDonald’s, creating category-leading brands in the U.S. that today regularly serve 300 million consumers at over 30,000 U.S. restaurants. Consider these two factoids: 1) recent government studies suggest that the middle class in mainland China now numbers over 250 million people, the equivalent to the entire U.S. population in 1990, at which time the U.S. QSR industry was already very well established; and 2) there are 547 million cell phone subscribers in China, which underscores how rapidly the consumer base is embracing new technology and concepts. Clearly, just like the founders of the brands I just mentioned, we are the pioneers on the ground floor of a booming category in a growing mega market. We fully expect to win big by capitalizing on the total opportunity. To us, winning big in China means building leading brands in every significant category. So in addition to KFC and Pizza Hut casual dining, we are now successfully developing Pizza Hut Home Service which already has 23 units in Shanghai and is now beginning national expansion to meet the growing demand for convenient meals at home given the rise of dual income households. We’ve also generated a lot of local consumer excitement by creating our own quick-service restaurant chain, East Dawning, tailored to the local favorites of the Chinese customer. Obviously, Chinese people’s favorite food is Chinese cuisine, so we are offering delicious, affordable, convenient Chinese food in appealing facilities that differentiate us from local competition. We continue to enhance the concept and are making dramatic progress improving our unit economics, especially with sales increases from the launch of television advertising. Our team is confident that we will make East Dawning a success and believe it could be our highest potential concept given the obvious broad appeal of Chinese food in China. Believe me, the concept is getting better and better every time I see it in my frequent visits to China and I’m a believer! I often get asked the question of how big we think we can be in mainland China. Our best long-range forecast is over 20,000 restaurants. The way we look at it, KFC can be every bit as big as McDonald’s is in the U.S., ultimately reaching 15,000+ units; Pizza Hut Casual Dining can equal the casual dining leader in the U.S., Applebee’s, achieving 2,000+ units; Pizza Hut Home Service can match category-leading Domino’s in the U.S., achieving 5,000+ units; and East Dawning is attacking the Chinese equivalent of the U.S. hamburger category—so who knows how high is up? The unarguable conclusion based on the opportunity we see on hand is that we are in the first inning of a nine inning ball game. We have a great lead, and plan on winning big! CHINA DIVISION KEY MEASURES: 20% OPERATING PROFIT GROWTH; +20% SYSTEM SALES GROWTH IN MAINLAND CHINA; AT LEAST 425 NEW UNITS PER YEAR IN MAINLAND CHINA. Yum! Restaurants International (YRI), which operates in over 100 countries and territories outside of China and the U.S., had its best year yet in 2007. YRI delivered same store sales growth of 6%, system sales growth of 15% and operating profit growth of 18%, resulting in record operating profit of $480 million. Here we have a high return franchising model with 87% of the business being owned and operated by franchisees who are also opening up over 90% of the new restaurants and generating $568 million in franchise fees, requiring minimal capital on our part. Like China, YRI is a tremendous growth vehicle, but we believe it may have even more potential. While KFC and Pizza Hut are already global brands, with a total of 11,686 restaurants, we have barely scratched the surface reaching a combined population of 5 billion people. What’s more, we are getting stronger and more diversified each year. We opened a record 852 new traditional restaurants across six continents last year. That’s the eighth straight year we’ve opened more than 700 units. Our ever increasing scale fuels growth as more restaurants and more sales leads to more marketing and an even stronger organization. In fact, our system spent approximately $650 million in marketing last year while YRI spent $375 million in G&A. This global infrastructure, coupled with our over 750 dedicated franchisees, is our single biggest competitive advantage at YRI. For this we are largely indebted to PepsiCo who, prior to our spin-off in 1997, invested 40 years and billions of dollars to establish the global network we’ve turned into a 12,000 unit powerhouse. The reality is it would take the same time and commitment for our competition to reach our size and scale, and frankly, we don’t expect most U.S. competitors to have significant international businesses for a long time to come. We’re focused on profitably driving international expansion in three global arenas— franchise only markets, established company operations markets, and emerging, underdeveloped markets with huge populations. When you look at our core franchise and company business in total for the year, I’m especially pleased with the consistently strong results we had across the board, with only a very few soft spots. Our franchise restaurants generated franchisee fee growth of 15% in 2007 and I’m especially pleased with the consistent growth we are seeing from our great franchise business units. I’d like to give a special congratulation to our teams in Asia 19%, Caribbean Latin America 12%, Middle East Northern Africa 32% and South Africa 32%. In our company ownership markets, our Australian and Mexico businesses had excellent years on top of strong year ago performance, which is the kind of consistency we are striving for. We were also pleased to see our KFC U.K. business turn around with exceptional same store sales growth in a challenging market. If you’ll recall, we purchased the remaining 50% interest in 544 Pizza Hut Restaurants in the U.K. from Whitbread, PLC which had been an underperforming market. While the team has set a clear direction for a turnaround, the business continues to struggle and while we are confident of achieving long-term success, the fact is our plans have not yet paid off. South Korea is another underperforming country, and we have put in new management to give the business a fresh set of eyes and the right new initiatives. For the longer term, we are clearly mindful of the need to develop new growth opportunities, and that's why we are aggressively developing emerging markets with huge populations. Take India for example, a country with over a billion people, 60% under the age of 30, and an economy growing 8% annually over the past three years. We take pride in our progress at Pizza Hut, where we now have 140 restaurants in 35 cities and have been named the "Most Trusted Food Service Brand" in India for three years running by the Economical Times. And we are enthusiastic about the prospects for KFC, which now has 31 units in 9 cities. We are consistently growing our presence and building sales momentum in this large and rapidly growing market. Like China, we are building an outstanding local team and putting the infrastructure in place to capitalize in India on what is clearly acknowledged as the next major market in the world. In Russia, I's pleased to report our partnership with Rostik's, the country's number one fast food chicken chain, looks to be everything we're hoped for. We're made major headway converting the majority of our approximately 100 restaurants to KFC's product line which our customers absolutely love. By the way, considering that it took us ten years to develop 100 restaurants in China and India, our partnership with Rostik's gave us a gigantic jumpstart with local operating expertise in Russia's very challenging operating environment. What's more, countries like Vietnam, a small country with a surprising 80 million people is on our radar screen. We now have 40 KFCs and 2 Pizza Hut casual dining restaurants there, with a target to have at least 100 KFCs by 2010. We are also making plans to leverage our leading KFC South African platform for further African expansion, targeting Nigeria first, and we've like to replicate that on other parts of the continent. Today, KFC South Africa has 479 restaurants with the highest KFC transactions in the world and five-year average system sales growth of 29%. Additionally, we are making big strides in European markets, where McDonald's has a huge presence and we are basically on the ground floor of a giant skyscraper building. Most people are amazed to learn that our very highest KFC unit volumes in the world are in France, proving the universal appeal of the brand. Finally, given the popularity of Taco Bell and the fact it is the second most profitable brand in the U.S., we are now planting the seeds to take it global. We are opening Taco Bells in the Philippines and Mexico, with plans to develop in Dubai, India, Spain and Japan over the next couple of years. While the potential is immense, the task is difficult because we have to establish the Mexican food category and build awareness of the brand, both of which are unfamiliar in most countries. We will learn as we go, but our intent is to go, and win big. YRI made $480 million in operating profit during 2007 and together with China, accounts for over 50% of our operating profits compared to just 20% ten years ago. With the benefit of increasing global prosperity, our strong global competitive positioning, massive, underpenetrated markets, aggressive franchisee-led growth and exciting new growth drivers, you can see why we view YRI as our division with the greatest long-term potential. We are now truly a global powerhouse with a realistic new-unit development opportunity that is unrivaled by anyone in restaurants or retail. In fact, we think YRI's global potential will reach at least 40,000 restaurants to go along with our over 20,000 China estimate. INTERNATIONAL DIVISION KEY MEASURES: 10% OPERATING PROFIT GROWTH; AT LEAST 5% SYSTEM SALES GROWTH; 750 NEW UNITS PER YEAR. While we clearly believe we have identified the way to win big in the U.S., I’m obligated to report the reality is we are not achieving the kind of success we know we can. The fact is even though our category-leading U.S. based brands have continually demonstrated outstanding unit economics on a stand-alone basis and generated nearly $700 million in franchise and license fees, we have fallen short of our goal to grow profits at least 5% every year. It’s even more disappointing to report that 2007 was a year where same store sales were flat and operating profits were down 3%. Frankly, the best thing I can say about our weak U.S. performance in 2007 is that we get to overlap it in 2008! This is especially true when you consider that last year’s results were primarily impacted by two isolated, and now thankfully distant, highly publicized product supply and pest incidents that affected our largest and most profitable brand, Taco Bell—while Pizza Hut made progress and KFC basically stood still. Nevertheless, we turned this adversity into an opportunity by using the lessons learned to take additional precautions to enhance our stringent food safety and operation standards for all of our brands. There’s no question our number one challenge is to turn the U.S. performance around. And as we put 2007 behind us, our poor results have only strengthened our resolve to take the bold steps necessary for us to win big going forward. The way we see it, our nearly 18,000 underleveraged traditional restaurants represent our greatest opportunity. When you look at the top 10% of our highest performing restaurants, the volumes are almost twice what our system averages are. So clearly we can sell a whole lot more at each of our brands than we are today. More importantly, we have learned from our experience building a strong and growing business in China, and by studying the enormous success McDonald’s had in the U.S. the past five years as they grew sales 6% from their existing assets. Our conclusions led us to implement five key strategic initiatives to help us unlock the value of our U.S. assets: Later in this report, each of our brand presidents will tell you how they are transforming their brands and attacking each of these areas. Our category-leading brand restaurants present tremendous upside and we are determined to capture it. Given that Taco Bell is already the second most profitable quick-service restaurant brand in the U.S., we are now in the position to open a significant number of stand-alone Taco Bells along with KFC-Taco Bell multibranding units. With Taco Bell well-positioned in the quickservice restaurant space, we are driving net-unit development in the U.S. with this brand. We are targeting to do the same across our entire U.S. business by 2009 as our turnaround plan takes hold. When you consider McDonald’s has almost 14,000 traditional units in the U.S. compared to only 5,000 traditional Taco Bells and 5,000 KFCs, there’s plenty of territory we can still penetrate. We also continue to develop Long John Silver’s and A&W All American Food as a multibranding option for our franchisees, while continuing to improve the appeal of both brands. In addition to pursuing profit and new unit growth, we continue to pursue refranchising. We have successfully executed this concept since we started our company. If we can run our stores well and provide great returns to our shareholders, we’ll own the restaurants ourselves. If our company operations are not getting margins that well exceed our cost of capital, we’ll sell our restaurants to franchisees who can do a better job of running them. Taco Bell has earned the right to own, so we will only marginally reduce its ownership over time, continuing to own about 25% of the system. On the other hand, we will be taking total U.S. ownership down from 22% to possibly less than 10% by owning fewer Pizza Huts, KFCs and LJSs. The goal for this realignment is to improve operations with franchisees, increase our focus on brand building, and in so doing, generate proceeds that allow us to reinvest in growth opportunities that improve shareholder returns. I have to acknowledge there are those who are skeptical about our ability to transform our U.S. business. Of course, seeing is believing. This only motivates our U.S. teams more and now we have to walk the talk. Given the transformational strategies we’ve developed and plan to implement over the next couple of years, we feel like we’re playing on a big stage with a winning hand no one sees. As I said in December at our annual investor conference, our U.S. business is an outstanding “value investment” with tremendous asset leverage opportunity, and we are committed to winning big by unlocking this value over the next two to three years. U.S. BRAND KEY MEASURES: 5% OPERATING PROFIT GROWTH; 2–3% SAME STORE SALES GROWTH The good news is we already are a leader in Return On Invested Capital (ROIC), not only among restaurant companies but among large-cap global retailers and consumer packaged companies as well. So, we’re going forward from a position of real strength. Any way you look at it, Yum! Brands is an incredible cash machine, with each of our divisions generating free cash flow—or effectively funding their own capital investments. As this capital is deployed to high-return opportunities—for example, new restaurants in China, where the cash payback is only two years—we expect total returns to remain strong. These returns will further improve as we continue to refranchise restaurants, which will increase our franchise fees—currently amounting to $1.3 billion—with minimal capital investment. We’re proud of the fact that we are one of the few companies that can CONTINUE to make significant capital investments year after year (in the $600 to $750 million range), AND make great investments in large scale buybacks (reducing outstanding shares by 6% in 2007), AND pay a meaningful dividend (2%) AND grow EPS in the double digits. I think it’s safe to say there are not many companies doing this. In closing, I want you to know we will continue to be galvanized around building what we call the Yum! Dynasty, with the result being one of the world’s most consistent and highest performing companies. Our focus on consistency has allowed us to quintuple our stock price since our 1997 spin-off, making us one of the top performers on the New York Stock Exchange. While we can certainly be proud of our progress: I’D LIKE US TO CONSIDER THIS AS IF WE WON THE FIRST SET OF A TENNIS MATCH 6– 0. AND I’D LIKE TO CONSIDER THE START OF OUR SECOND DECADE AS THE START OF THE SECOND SET!!!! Have you ever wondered why is it that the player who wins the first set by a wide margin often goes on to lose the second set? When you think about it, I’m sure you’ll agree it’s for two reasons: the competitor who lost becomes even more determined and changes his game so he can win the second set; and at the same time, the player who won the first set becomes somewhat complacent. Well, our competitors are definitely out to raise their game and the last thing I want is to see our company become complacent. That’s the absolute kiss of death. So we need to draw a line in the sand, and adopt a second set mentality to win big again in this decade. If you look on the next page and on the inside of the back cover, you will see the road maps for our second set. Just as importantly, we owe it to ourselves and shareholders to drive for breakthrough results with a significantly higher sense of urgency. New behaviors like “Go for Breakthrough,” “Build Know How” and “Take the Hill Teamwork” will be cascaded and implemented as job requirements and the way we win together. We are in the process of teaching a tool kit that will help ALL our franchisees, and restaurant support and field leaders make these behaviors a part of the way we attack the business every single day. The expectation is it will have a positive impact on all our restaurants around the world. Clearly, we all have a lot to learn and it will be a journey as each of us strives to grow our piece of Yum! to reach our full potential. You’ll see in this Report how our corporate social responsibility effort is helping hundreds of thousands of starving children move from hunger, to hope. We view this as both a privilege and responsibility. We will keep working on this serious global issue until it no longer is one. Believe me, our people are focused on WINNING BIG around the globe, from our business results to our corporate social responsibility. Stay tuned. The best is yet to come! Yum to you! Download Yum! 2007 Annual Report PDF format, 6.8MB, 86Pages. CONTENTS KFC, our only major soft spot, had a challenging year. President Gregg Dedrick retired and he was replaced by Roger Eaton, who brings tremendous experience leading our businesses, including seven years running the Australian market, where he delivered consistent same store sales growth in a highly competitive, highly penetrated market. YUM! Brands, Inc. (YUM) is a quick service restaurant (QSR) with over 36,000 units in more than 110 countries and territories. Through the five concepts of KFC, Pizza Hut, Taco Bell, LJS and A&W (the Concepts), the Company develops, operates, franchises and licenses a worldwide system of restaurants, which prepare, package and sell a menu of food items. Bookmark
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| Last Updated ( June 04 2009 ) |
Dear Partners, I think you’d agree there’s nothing more satisfying than being on a winning team, and I think you’ll see from this report that we are absolutely focused on gaining the satisfaction of winning big around the globe. 
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