U.S. investors have a new pure-play opportunity in China's restaurant industry.
Kentucky Fried Chicken, Pizza Hut, and Taco Bell parent company Yum! Brands (YUM 0.28%) recently divested its Chinese business from the rest of its sprawling global enterprise. The new company, Yum China (YUMC +1.60%), became an independent publicly traded company on Nov. 1, 2016. Here are three points for investors to consider regarding this international business.
Image source: Yum China.
Yum China is huge
A few years ago, Yum Brands' operations in the world's most populous country had grown to represent half of its total revenue. Chinese diners loved the company's KFC and Pizza Hut chains, so much so that they became the largest ones in China's large restaurant industry.
The newly formed Yum China still holds that title, with over 7,500 restaurants in operation. While Yum Brands will continue to control the rest of the world, Yum China owns exclusive rights to KFC, Pizza Hut, and Taco Bell in its home country. It has over 5,000 KFC and nearly 2,000 Pizza Hut locations, with the balance made up of other chains like the wholly-owned East Dawning fast-food and Little Sheep Mongolian hot pot brands.
Opportunities in China keep on coming
With 1.4 billion people and the second largest economy behind the U.S., about 60% of the population lives in urban areas, where Yum China has chosen to locate its restaurants. At last report, the company operated in over 1,100 cities across the country.
Image source: Yum China.
Operating in densely populated urban centers has helped Yum broaden its reach, and those markets are getting larger. In the next five years, China's urban population is expected to grow by another 75 million people, bringing more people into contact with its popular brands.
China's middle class is also growing. While cities expand, transportation hubs like airports, train stations, and bus routes are set to double in number, and 1,200 more shopping malls are slated to be opened. All of those developments help increase the number of potential diners at Yum China's restaurants.
Growth is in the air
Yum is celebrating its 30th anniversary in China this year, and the company isn't content with its current footprint in the country. Now that Yum China is free to operate on its own, a big expansion is planned over the next few years.
As the aforementioned transportation hubs and shopping malls get built, the company is planning to put a new restaurant in each one, and the growing cities will also get new stores as needed. This plan is already in motion, as 575 new locations cut ribbons in 2016, an 8% increase in the company's store footprint. Taco Bell is also just getting started, with the first location opening in Shanghai.
The company is also looking to pursue growth in existing stores and through delivery -- 75% of restaurants have been remodeled within the last five years, and Yum China celebrated independence with new digital marketing campaigns featuring Chinese celebrity endorsers and popular cartoon characters like Kung Fu Panda.
Signs of life for Yum China
These encouraging developments come after Yum! Brands had seen growth stall in the region. A food scare several years ago gave the brands a black eye, and same-store sales were in full retreat.
Now separated from its former parent company, Yum China has more flexibility to make fast, strategic decisions tailored to its local market. Revenue grew 5% year-over-year in 2016, and same-store sales increased 3% at KFC and were flat across all chains.
While much work remains to be done, the company is showing early signs of progress. For investors interested in the restaurant industry, this one is worth keeping an eye on.
