Yum! Brands (NYSE:YUM), the parent company of fast-food restaurant chains KFC, Taco Bell, and Pizza Hut, realized massive growth and profits from expanding its KFC and Pizza Hut restaurants in China in the last few decades. However, a slowing Chinese economy and the beginnings of market saturation in major cities there have crimped the company's total revenue growth. The stock fell sharply after the last quarterly earnings report as Yum! management cut its year-end profit forecasts for 2014.
However, Yum!'s future might still include incredibly high growth not unlike what China delivered in the past. This time, though, Africa could be the growth driver.
Africa set for long-term growth
The economies of many African nations are starting to climb in a way similar to China's growth following economic reform in the 1970s and 1980s when a flood of foreign direct investment and infrastructure improvements helped the country transform from an agricuture-dominated economy to a service and export-dominated one. According to the African Development Bank Group, Africa's economy (excluding South Africa) grew by 6.8% year over year in 2014, compared to 6% in 2013.
Business and infrastructure is booming in Africa, not only based on the continent's resource economy, but also sectors including leisure and consumer goods. Many businesses around the world are seeking investments in Africa. Earlier this year, President Barack Obama and over 200 business leaders attended a forum on promoting African-U.S. trade.
Yum! Brands' push into Africa
Yum! made its first major push to bring its Pizza Hut concept to Africa last September, opening two locations in Johannesburg, South Africa. This is the start to what Pizza Hut management says will be a major push to spread the chain across the continent, with "dozens" more Pizza Huts in South Africa in the next three years and expansion to other African nations.
Yum! opened its first KFC on the continent in 2010, and now has nearly 1,000 KFC locations in 17 African countries. YUM! continues to increase the pace of building new KFC locations in Africa with 70 new restaurants in 2013 and what was expected to be 130 in 2014.
Between these two restaurant brands (in 2013 Yum! management said that Taco Bell in Africa was "not in the cards" yet), Yum! is seeking a much bigger African presence in the near future. As Scott Bergren, Pizza Hut CEO and Yum! Brands chief innovation officer, said in a press release in September 2014:
Africa is an emerging continent with more than 1 billion people and endless possibilities for us to grow Pizza Hut over the long-term. We're pleased to bring Pizza Hut to South Africa and look forward to expanding the Brand in other African countries in the future. We've just scratched the surface of growth and we're aggressively accelerating Pizza Hut's development across the Delivery, Express, and Dine-In channels globally.
With predicted consumer spending of $2.5 trillion by 2020, Africa presents a great opportunity for a consumer brand such as Yum!. The company can target its international food options at the continent's growing middle class and young population.
Is Yum! Brands a value now?
Investors who bought in early to Yum! Brands' massive growth in China would have been rewarded nicely in the following years. However, now that Yum! shares are down on flat growth, is potential growth in Africa a reason to bet on this company?
Yum! is a leader in gaining on emerging-market trends. Even in 2013, with growth down from prior years, the company opened nearly 1,950 locations outside the U.S., primarily in emerging markets. In the U.S., there are 58 Yum! restaurants per million people. However, in emerging markets, that number drops to two restaurants per million people. In Africa, with a population over 1 billion and more than 50 countries, the number is far lower. That's why the company believes it has plenty of room to run expanding in Africa.
With shares down about 12% from their high in July 2014, regardless of income growth in the most recent quarter, Yum! looks like a value. Couple that with the potential for massive growth in emerging markets outside of China, particularly in Africa, and this could be a great value play.