Yum! Brands May be on Track for Shareholder Backlash

Sure, the market reacted favorably to Yum!'s Q4 earnings, but that is no match for the company's inherent risks.

Feb 23, 2014 at 12:13PM

Screen Shot

Taco Bell's Fresco Menu. Source: Taco Bell.

Yum! Brands (NYSE:YUM) released its fourth quarter earnings earlier in the month. Although shares went up 9% the following day, there are still a number of risks that investors should consider before buying in to the fast food giant.

A recent USDA study states that working-age adults are beginning to consume fewer calories, and are choosing to abstain from eating at fast food restaurants . This, combined with lackluster earnings, could spell a big risk for Yum! shareholders.

Getting on the health bandwagon
With caloric intake on the decline and trust in organic products increasing (42% of parents report that their trust in the organic seal has increased),  Yum! -- offering high calorie options with no organic ingredients -- will have a lot of catching up to do. Adults in the U.S. are choosing to eat at home more often , and when they do choose to eat out they are increasingly concerned with the quality and source of what they are eating .

Yum!'s major brand offerings, KFC, Pizza Hut, and Taco Bell, aren't exactly the poster children of health-conscious eating. Sure, Taco Bell has taken on a healthy options menu, but such a small offering makes the chain no match for one of its greatest competitors, Chipotle Mexican Grill (NYSE:CMG).

What has Yum done for you lately?
Yum!'s earnings have left a bit to be desired recently. For instance, US same store sales were flat for 2013. Sure, Taco Bell grew at 3%, but Pizza Hut and KFC negated that improvement with each brand declining by 2%. Compare that to Chipotle, which saw comparable store sales increase by 5.6%. Even though the aforementioned market reaction was positive, Yum!'s long term product relevance  could be in jeopardy.

Of course, it shouldn't be assumed that Yum!'s limited health-conscious and sustainably sourced menu items are to blame for the company's flat growth. But ignoring the emerging trend of conscious consumption won't bode well for the fast food giant.

Don't turn a blind eye
In recent years, fast food chains have been the center of inquiries from meddling bloggers that questioned the industry's choice of ingredients. . For instance, Chick-fil-A, a direct KFC competitor, was challenged to take artificial dyes and antibiotics out of their supply chain. Due to the pressure that Chick-fil-A felt from this conscious-consumer blogging movement, the chicken chain has committed to phasing out antibiotic within 5 years. The landmark announcement was also in reaction to surveys documenting that 70% of customers rate antibiotics in meat as a top issue .

Tyson Foods (NYSE:TSN) committed to a campaign centered around chicken "raised without antibiotics," only to inject its eggs with antibiotic-laden vaccines. Chick-fil-A on the other hand, has committed to "no antibiotics ever." Yum! could take a page out of the Tyson book and only halfway commit to addressing growing consumer demand for greater supply chain transparency.

If Yum! chooses to move forward in that manner, it will likely be faced with similar challenges as Tyson, which has been recently criticized for its treatment of livestock as well as its relationship with its contract farmers. Yum!'s supply chain practices could likely come under fire as well, a risk that shareholders will likely not take too kindly to, as evidenced by the pushback Tyson recently received from shareholders. If Tyson and Yum! continue to ignore the growing concern around supply chain transparency, antibiotic use, and livestock living conditions, both companies will be facing increasing risk in the years to come. This risk should be a concern for potential Yum! and Tyson investors.

The other option for Yum! could be to take a look at how Chipotle is "cultivating a better world" through serving "food with integrity" and bet on the changing tide of conscious consumers.

Emerging markets, emerging risk
Yum! is committed to its expansion into both China and India, citing "their strategic importance and enormous growth potential ." But the company might be losing sight of what's happening on its home turf. Their choice to half-heartedly address supply chain and ingredient concerns is a risk to shareholders, and could become a detriment to its revenue stream.

The fast food mogul has an opportunity to tap into an emerging market of conscious consumers here at home, a market that boasts a loyal following. Without an earnest commitment to creating change within its supply chain, Yum!'s relevance might begin to whittle away in the States.

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Leah Niu has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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