Fast-food giant Yum! Brands announced plans to spin off its Chinese operations in a bid to revitalise a business under pressure, while Jollibee Foods Corp., Asia’s largest chain, invested in US fast-casual burger operator Smashburger.
Yum! Brands eyes China recovery through spin-off
On 20 October, the fast-food giant announced plans to split in two through the spin off of its Chinese business. Yum! China will become a franchisee of Yum! Brands in mainland China, with exclusive rights to KFC, Pizza Hut and Taco Bell, although the latter chain is not yet present in the country.
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Analysts have been expressing concerns over Yum!’s performance in China, where it opened its first KFC two decades ago. The business has come under pressure for three reasons: the KFC brand is said to no longer been seen with the same cachet by Chinese consumers as it once was, the chain is facing rising competition and, last year, was hit by a food safety scandal.
CEO Greg Creed touted the benefits of the split. “Yum! Brands will have a more stable earnings stream typical of a franchise company powered by industry-leading brands, while also benefiting from the development of the China business as a unique growth engine. In turn, our China business is self-sufficient and scalable with strong leadership in place, and is well-positioned to realise its full potential as a standalone business to capture the compelling opportunities in China.”
The announcement came two weeks after Yum! admitted its hoped-for recovery in China was taking longer than expected. Same-store sales from KFC’s Chinese outlets rose 3% in the quarter to 5 September, while Pizza Hut sales dipped 1%. The results prompted Yum! to issue a profit warning.
To underline the interest in Yum!’s business in China, the word China was mentioned 135 times on the investor call to discuss its third-quarter results on 7 October.
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By GlobalDataYum! insisted its team in China was “working with urgency” to improve sales in the country. The company has an investor day planned next month in which China will be a key point of discussion.
Jollibee heads West to invest
October saw US chains including Johnny Rockets and Cold Stone Creamery – but there was significant moves of a major chain expanding its presence in the country.
Asia’s largest restaurant company, the Philippines-based Jollibee Corp., last month struck a deal to buy into US fast-casual burger chain Smashburger.
Jollibee moved to buy 40% of a business with over 300 corporate and franchised restaurants operating in 35 US states and seven countries. Smashburger continues to grow at a rate of 20% annually, the companies said.
The largest restaurant chain in the Philippines, Jollibee has a global network of over 3,000 stores, with outlets in markets including China, Vietnam, the Middle East and the US.
“This acquisition will make JFC’s presence in the US more significant, going beyond the Filipino market and serving mainstream consumers in the $100bn US burger market, a food segment which is estimated to be almost three times larger than the pizza, sandwich or coffee segment in terms of sales,” Jollibee chairman Tony Tan Caktiong said.
Smashburger president and CEO Scott Crane said the investment would bring “additional energy and resources” as the chain expands – and one market it is to enter is the UK, where, as Technomic’s David Henkes wrote in his just-food column last month, the fast-casual channel is set to take off.
More operators make moves on ethics
Starbucks and Subway became the latest mainstream foodservice operators to announce measures on animal welfare.
Coffee shop giant Starbucks has given itself a goal of switching to using only cage-free eggs by 2020. The company said it first started buying the eggs in 2008 and had made “significant progress”, upping the amount it sourced every year. It said there was “work to be done across the industry to increase supply to address market conditions” but would work with its suppliers to hit the 100% target.
At Subway, the sandwich chain said “in early 2016” it would start a move to serving only meat from animals that have never received antibiotics. The switch will cover all of Subway’s 27,000-plus outlets in the US.
In an indication of the sourcing challenges, Subway outlined a three-step process. The transition to chicken raised without antibiotics will be completed by the end of next year but the switch to antibiotic-free turkey. while starting in 2016, is expected to be done within two to three years. For pork and beef, the timetable stretches out further, with Subway saying the move will be complete by 2025.
“A change like this will take some time, particularly since the supply of beef raised without antibiotics in the US is extremely limited and cattle take significantly longer to raise. But, we are working diligently with our suppliers to make it happen,” Dennis Clabby, executive vice president of Subway’s independent purchasing co-operative, said.
The announcements follow recent moves from McDonald’s and underline more operators in the US ware waking up to demand from an increasing number of consumers for animal-friendly sourcing.
Signs of sales slowdown at Chipotle?
US fast-casual chain Chipotle Mexican Grill has been seen as one of the operators at the forefront of meeting demand for more ethically-produced food – and of course driving the market forward and being a factor in its larger peers to act.
However, the company’s third-quarter results suggested it is finding it more challenging to enjoy the same robust sales growth seen in recent quarters.
Chipotle reported a 2.6% rise in comparable-store sales for the three months to the end of September. Compare that with the 17% growth the operator saw in 2014.
Alongside the results, Chipotle maintained its forecast for full-year comp sales to grow in the “low-to-mid single digits” – but it gave its first official guidance for 2016, when it expects sales to rise at a low-single digit rate. Throw in third-quarter earnings that missed analyst forecasts and Chipotle’s shares fell.
Now, the operator also forecast it expects to open more outlets in 2015 than it had previously thought, so not all is doom and gloom.
However, Chipotle’s throughput metrics – the rate at which it serves customers – were mixed during the quarter, with co-CEO Monty Moran admitting the chain “took our eye off the ball a little bit”. CFO John Hartung, reflecting on Chipotle’s sales performance during the quarter, said: “I would say we’re just kind of holding our own. We’re not decelerating, but I don’t see us accelerating either.”
In a way, much of this is hardly a surprise. After a period of stellar growth, most businesses lose some steam. Furthermore, the chain is operating in a fiercely competitive sub-sector, while some of the larger foodservice operators (McDonald’s, for example) are looking to burnish their own ethical credentials.
What can Chipotle do from here? Continued expansion in the US is on the cards. Some analysts have pointed to the potential for two of Chipotle’s other newer concepts in the US – ShopHouse and Pizzeria Locale. Meanwhile, the operator is building a business for its core chain in Europe.
