Louisville-based Yum Brands will trim the fat after it spins off its China operations on Nov. 1, but those cuts won’t include a departure from Louisville, Yum Brands CEO Greg Creed said.
“We are not going to be shutting down the Irvine office or the Louisville office,” Creed said during Tuesday’s annual investors conference in New York City.
The company has repeatedly noted its commitment to keep a presence in Louisville after Yum Brands top C-suite executives moved their primary offices to Texas where the company’s international division is located.
Yum Brands has set the goal of reducing its annual capital investments from $500 million to $100 million by fiscal year 2019. It also plans to reduce its general and administrative expenses to roughly $300 million by fiscal year 2019.
Executives plan to create a leaner “new Yum,” the nickname given to Yum Brands sans China, and hope to grow system-wide sales by 7 percent. No timeline was given to meet that growth goal.
Once Yum Brands spins off its China division into Yum China Holdings, it also will move closer toward its goal of becoming a 98 percent franchised company by the end of fiscal year 2018. Only 77 percent of Yum Brands stores — KFC, Pizza Hut and Taco Bell — are owned and operated by franchisees currently.
“We will reinforce the distinctiveness of our brands and their relevance to customers, select the highest potential franchisees and help drive their success, expand more profitably in key markets across the globe and bolster training and talent initiatives to foster the culture that will be especially critical as we evolve into a highly franchised growth company,” Creed said in a news release issued ahead of the investor conference.
At the conference, Yum Brands executives updated investors on the spinoff of its China operations and plans to grow those operations separately from Yum Brands in the United States and other international countries.
Yum Brands previously promised to return $10 billion to shareholders before the end of 2018 as part of the China spinoff, but now, it expects to return a total of $13.5 billion by 2019.
“We have plenty of cash to return to shareholders,” Creed said.
One investor asked Tuesday if Yum Brands considered spinning off one of its three brands — KFC, Taco Bell or Pizza Hut.
The company considered all options, Creed said. He didn’t comment on whether that was a future possibility, instead shifting talk to the pending China split.
The spinoff of China is not a traditional spinoff, Creed noted. Unlike when Yum Brands separated from PepsiCo, new Yum will still have a vested interest in Yum China Holdings, which will pay a 3 percent licensing fee to Yum Brands.
“We are in this with China,” Creed said. “We want them to be hugely successful.”
Its operations in China will go from accounting for 45 percent of Yum Brands sales to making up 14 percent of its sales. This will allow Yum Brands to continue to benefit from growth in China but insulate it more from the growing country’s sometimes volatile market.
Meanwhile, Yum China Holdings is gearing up for rapid growth, said Micky Pant, who will officially become CEO of Yum China Holdings when the new company debuts on the stock market on Nov. 1.
The company will start with zero external debt and more than $900 million in cash, partially thanks to a $460 million investment agreement with Primavera Capital Group and Ant Financial Services Group.
“We got partners that have a great strategic knowledge of China and the Chinese market,” he said. “We share a common vision of creating one of the finest companies in the world.”
China is already a global economic powerhouse with a population of nearly 1.4 billion people, and the country is in the process of creating 19 city clusters across China that each are expected to have populations of at least 20 million people in concentrated areas.
Although Yum Brands is the dominant Western restaurant chain in China, Pant said, it still has plenty of room to expand. Yum Brands only has five restaurants, mostly KFC or Pizza Hut Dine-In stores, per 1 million people. In Malaysia, the company has 33 restaurants per million people.
“I don’t really see any reason why …we can’t have 20,000 restaurants in China,” Pant said.
Yum China Holdings will focus on expanding its footprint in urban centers and target spaces in transportation hubs and shopping malls. Pant said Yum Brands has three to five restaurants in every China high-capacity transit hub, and they are some of its best performing locations.
Separate from Yum Brands, Yum China Holdings plans to open 600 new stores and invest around $600 million in capital expenditures annually. It will build same-store sales growth by focusing on menu innovation across all meal times, renovating stores, pushing mobile pay and its digital loyalty program, and improving its delivery operations.
Successfully spinning off Yum China Holdings “starts with driving consistent same-store sales and profit growth,” said Ted Stedem, CFO of Yum China Holdings. “This is our top priority.”