Investors have lost focus on just how profitable and valuable Yum! Brands, Inc. (NYSE:YUM)‘ growth prospects truly are. Despite the 2013 profitability setbacks and scandals in China, the company’s most important market, Yum! Brands, Inc. (NYSE:YUM) is poised for a long-term growth. By 2015, the company hopes to earn 75% of its profit from its global operations, giving investors a unique opportunity to benefit.
China’s short-term and long-term outlook
I believe that the company will recover from the chicken scandal and avian flu scare sooner rather than later. This belief is based on a similar recovery it saw in 2005/2006 following the discovery of a cancer-causing Sudan Red IV in KFC which came only a year after the 2004/2005 avian flu flare ups. After each incident, the company has been able to stem its losses in traffic and drive customers back to their stores sooner than its peers.
I believe the latest incidents (the chicken supply scandal in December 2012, and the avian flu scare in February 2013) will also pass and customers in China will resume their dining habits at the various Yum! Brands, Inc. (NYSE:YUM) restaurants. Management is optimistic that a recovery will occur as early as the fourth quarter of 2013. Analysts at Stifel have shown how the company has recovered from prior incidents in the past.
Longer term, I believe that the Chinese restaurant sector is a top investment opportunity. To understand this requires a brief overview of the political system. The Communist Party of China (CPC) owns and operates the vast majority of businesses, and its primary political objective is to deliver economic growth without political unrest. This system has set up a situation where the vast majority of industries are dominated by State Owned Enterprises (SOEs) that drive the vast majority of economic growth in China and have only modest returns on capital through a pursuit of “growth for a growth’s sake.”
Now, here is where the restaurant industry comes in. The restaurant industry is the ideal foreign-firm sector in China because it is not dominated by these SOEs as individual restaurants are small, hard-to-execute projects. As a result, the restaurant sector does not compete directly against these SOEs presenting a tremendous opportunity for Yum! Brands, Inc. (NYSE:YUM) (and its investors.)
Major growth opportunities in India
Investors should be bullish on the long-term growth of India, which has the potential to become a billion dollar business in the next five to ten years. The company has plans to operate 1,000 locations in India by 2015. The Indian market consists of over one billion people and as the economy continues grow, incomes will rise and drive more urbanization that will help India become a hotspot for western restaurant concepts. India is now its own separate reporting division with business growth that could potentially rival China, as the country is a growing economy that is predicted to have the world’s largest consuming class within a decade can only be seen as a huge positive.
Yum! Brands, Inc. (NYSE:YUM) happens to be one of the first movers in India along with Starbucks Corporation (NASDAQ:SBUX), which is partnering 50/50 with Tata Global Beverages, the world’s second largest manufacturer and distributor of tea and coffee. Together, the two giants operate 15 locations in Mumbai and Delhi known as “Starbucks A Tata Alliance” with plans to have 50 outlets in hospitals, educational institutions and corporate campuses by the end of 2013. Starbucks Corporation (NASDAQ:SBUX) is also expected to roll out operations in untapped cities such as Bangalore and Chennai in the years to come.
Competition is fierce
McDonald’s Corporation (NYSE:MCD) is also aggressively expanding in China, and according to a Bloomberg article expects to hire 75,000 workers to supplement the 90,000 individuals that are already employed. McDonald’s Corporation (NYSE:MCD) is planning to open 300 new stores in the country, bringing its total to 2,000. The company hopes that its expansion plans will gain market share as it is currently losing the battle to Yum! Brands, Inc. (NYSE:YUM) in the most populated country in the world. In 2011, McDonald’s Corporation (NYSE:MCD) had a 15.6% share of the fast food industry, as compared to Yum! Brands’ much larger 39%.
The battle over who will control China will heat up over the next few years. McDonald’s Corporation (NYSE:MCD) holds the advantage of being the much larger company with over $2 billion in cash and can force a pricing war to gain market share, resulting in Yum! Brands lowering its prices and margins.
I believe that Yum! Brands’ market-leading position will help the company deliver large profits for years to come. The competition might be heating up, but the fast food market is certainly large enough for all major competitors to benefit from.
First mover in Africa
Yum! Brands is also building a network in Africa that hasn’t received as much attention from investors as it should. In South Africa, the company operates over 700 units and holds a larger company-owned presence in the remainder of the continent where stores are primarily franchised. KFC has been a major success thus far in Africa with virtually no competition from western or local concepts in many of the areas outside of South Africa. The company’s sales performance and unit economics have been strong, letting it benefit from the competitive advantage of being an early mover in the region.