Yum! Brands Inc.

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Yum! Brands Inc.

1441 Gardiner Lane
Louisville, Kentucky 40213
U.S.A.
Telephone:(502) 874-8300
Fax: (502) 874-8790
Web site: http://www.yum.com

Public Company
Incorporated: 1997 as Tricon Global Restaurants Inc.
Employees: 244,000
Sales: $7.7 billion (2002)
Stock Exchanges: New York
Ticker Symbol: YUM
NAIC: 722211 Limited-Service Restaurants

Yum! Brands Inc. operates the Taco Bell, Pizza Hut, KFC, Long John Silver’s, and A&W chains. The company is the largest quick-service restaurant concern in the world in terms of units with approximately 33,000 locations in over 100 countries across the globe. Taco Bell, Pizza Hut, and KFC were part of PepsiCo Inc.’s restaurant group until 1997, when they were spun off as Tricon Global Restaurants Inc. Tricon changed its name to Yum! in 2002, the same year that Long John Silver’s and A&W were added to its holdings.

Success at Pizza Hut Leads to a PepsiCo Purchase

Pizza Hut Inc. was established in 1958 by brothers Dan and Frank Carney in their hometown of Wichita, Kansas. When a friend suggested opening a pizza parlor—then a rarity—they agreed that the idea could prove successful, and they borrowed $600 from their mother to start a business with partner John Bender. Renting a small building at 503 South Bluff in downtown Wichita and purchasing secondhand equipment to make pizzas, the Carneys and Bender opened the first Pizza Hut restaurant; on opening night, they gave pizza away to encourage community interest. A year later, in 1959, Pizza Hut was incorporated in Kansas, and Dick Hassur opened the first franchise unit in Topeka, Kansas.

By 1971, Pizza Hut had become the world’s largest pizza chain, according to sales and number of restaurants—then just more than 1,000 in all. A year later, the chain gained a listing on the New York Stock Exchange. Pizza Hut also achieved, for the first time, a one million dollar sales week in the U.S. market. At the end of 1972, Pizza Hut made its long-anticipated offer of 410,000 shares of common stock to the public. The company expanded by purchasing three restaurant divisions: Taco Kid, Next Door, and the Flaming Steer. In addition, Pizza Hut acquired Franchise Services, Inc., a restaurant supply company, and J & G Food Company, Inc., a food and supplies distributor. The company also added a second distribution center, in Peoria, Illinois. In 1973, Pizza Hut expanded further by opening outlets in Japan and Great Britain. Three years later, the chain had more than 100 restaurants outside the United States and two thousand units in its franchise network. The company’s 2,000th restaurant was opened in Independence, Missouri. By now, Pizza Hut had caught the eye of PepsiCo Inc., the global soft drink and food conglomerate. In 1977, Pizza Hut became a cornerstone’s in PepsiCo’s restaurant division.

PepsiCo Adds Taco Bell to Its Arsenal

The Taco Bell brand was launched in 1962 by Glen Bell, a World War II veteran who had worked in the restaurant industry since 1946, when he opened his first hot dog stand in San Bernardino, California. His idea for franchising a Mexican-themed restaurant proved successful, and by 1970 Taco Bell had become a $6 million operation, producing annual profits of approximately $150,000. The fast food chain’s success soon drew the attention of PepsiCo Inc., the snack food and soft drinks giant, which was seeking to diversify into the restaurant business. By this time, Pizza Hut had launched its Mexican food concept to challenge Taco Bell. The launch failed, however, and Pizza Hut soon had to write off its investment. PepsiCo then altered its strategy and began wooing Glen Bell in order to buy Taco Bell outright. In February 1978, a deal was struck in which the Mexican fast food chain was purchased for just under $125 million in stock. PepsiCo’s strategy in acquiring Taco Bell was simple: the fast food chain dominated the Mexican food market, so PepsiCo was buying market share. For PepsiCo, the challenge was to make Taco Bell less a regional ethnic food phenomenon and more a national fast food chain. Glen Bell had originally sought to set Taco Bell apart from other fast food chains, McDonald’’s in particular, and its preeminent position among other Mexican food chains, almost all of them regional or local rivals, was already secure. PepsiCo’s decision to reposition Taco Bell was a challenge to the fast food giants on a national scale. The PepsiCo strategy emphasized that Taco Bell outlets would sport spartan simplicity in decor and menu, with a concentration on predictable quality, affordable prices, and clean and convenient surroundings. Taco Bell also moved swiftly to redesign the company logo. The old logo, a Hispanic man dozing under a giant sombrero, was replaced by a sparkling bell atop the company name. As Larry Higby, senior vice-president of marketing at Taco Bell, noted in Advertising Age, “Usually when you try to turn something around, you look to develop breakthrough advertising. But we came to exactly the opposite conclusion: we needed to look more mainstream.” The strategy worked. Taco Bell grew rapidly during the early 1980s. By 1983, when John E. Martin took over as president, the chain had 1,600 outlets in 47 U.S. states, producing a total of $918 million in sales. The average Taco Bell franchise claimed sales of $680,000 that year, a significant increase over the franchise average of $325,000 in sales only three years earlier. As a measure of market strength, Taco Bell’s nearest rival in the Mexican fast food segment was Naugles, a California-based chain with only 160 outlets and 1983 sales of $84 million. The company’s success continued throughout the 1980s and came even as a recession led to savage price-cutting and cutthroat competition in the fast food industry. This fact impressed industry analysts. A 1991 article in the Harvard Business Review named Taco Bell as the best performer in the fast food industry at the time, surpassing traditional market leader McDonald’s. The authors wrote, “If McDonald’s is the epitome of the old industrialized service model, Taco Bell represents the new, redesigned model in many important respects.”

The KFC Deal

Founded in 1952 by Harland Sanders, Kentucky Fried Chicken—the company’s name was changed to KFC Corp. in 1991—was added to PepsiCo’s holdings in 1986 in a $840 million deal. The company had spent much of the decade securing profits and expanding, and PepsiCo believed it would be a successful addition to its burgeoning restaurant portfolio.

While KFC’s international division saw significant growth during the 1990s, domestic sales were sluggish due to intense competition and failed product launches. To top it off, relations between its parent company and franchisees had deteriorated, and PepsiCo was not seeing the return on assets that it saw with its beverages and snack food divisions. As such, PepsiCo decided to exit the restaurant business all together.

Spin Off in 1997 Creates Tricon Global Restaurants

In the late 1990s, PepsiCo drew together its restaurant businesses, including Pizza Hut, Taco Bell, and KFC. All operations were now overseen by a single senior manager, and most back office operations, including payroll, data processing, and accounts payable, were combined. In January 1997, the company announced plans to spin off this restaurant division, creating an independent publicly traded company called Tricon Global Restaurants, Inc. The formal plan, approved by the PepsiCo board of directors in August 1997, stipulated that each PepsiCo shareholder would receive one share of Tricon stock for every ten shares of PepsiCo stock owned. The plan also required Tricon to pay a one-time distribution of $4.5 billion at the time of the spinoff. The deal was approved by the Securities and Exchange Commission and completed on October 6, 1997. Roger A. Enrico, who had risen to the position of PepsiCo CEO, explained the move: “Our goal in taking these steps is to dramatically sharpen PepsiCo’s focus. Our restaurant business has tremendous financial strength and a very bright future. However, given the distinctly different dynamics of restaurants and packaged goods, we believe all our businesses can better flourish with two separate and distinct managements and corporate structures.”

Indeed, Pizza Hut, Taco Bell, and KFC fared well after the spin off. Tricon immediately began to implement new strategies intended to bolster revenues and profits. The company also looked to strengthen its relations with its franchise locations. In the case of Taco Bell, the company began selling off company-owned stores to its franchisees. Pizza Hut also received a major face lift in the wake of the spin off. Hundreds of locations were sold back to franchisees and over 700 locations were shuttered. Company headquarters were moved to Dallas, Texas. The company also filed suit against competitor Papa John’s International Inc., claiming that is marketing tagline—Better Ingredients. Better Pizza. —was false and misleading. A court ruled in favor of Pizza Hut in 2000. Meanwhile, KFC opened its first outlets in Vietnam and Guadeloupe.

Company Perspectives

Our passion, as a restaurant company, is to put a YUM on people’s faces around the world, satisfying customers every time they eat our food and doing it better than any other restaurant company. A&W, KFC, Long John Silver’s, Pizza Hut, and Taco Bell offer customers food they crave, comeback value, and customer-focused teams. The unique eating experience at each of our restaurants makes our customers smile and inspires their loyalty for life. Toward that end, our 750,000 associates around the world are trained to be customer maniacs.

A Leader in the Quick Service Industry: 1990s and Beyond

As Tricon management worked to position itself as the leading operator in quick-service industry, it faced several challenges. Ameriserve Food Distribution Inc., its main supplier, declared bankruptcy in January 2000. The problem was soon resolved, however, when McLane Company Inc. agreed to buy the faltering company in November 2000. Tricon was also pushed to shelve its successful advertising campaign featuring a talking Chihuahua in 1999 after Taco Bell franchisees demanded that future commercials tout the company’s fresh food. Prompted by faltering sales, the firm launched its “Think Outside the Bun” slogan in an attempt to lure customers to its new, fresher products. At the same time, two men filed suit against chain claiming the firm stole their advertising idea for the talking Chihuahua. In 2003, a federal jury awarded $30.1 million to the two men. Taco Bell planned to appeal the verdict.

During 2002, Tricon added Long John Silver’s Restaurants Inc. and A&W Restaurants Inc. to its holdings in a $320 million deal with Yorkshire Global Restaurants Inc. The company changed its name to Yum! Brands Inc. that year, reflecting the company’s shift to a multi-branding strategy. Nearly 2,000 company restaurants were multi-branded units, offering customers a choice of either Taco Bell and KFC or Taco Bell and Pizza Hut at one location. With the purchase of Long John Silver’s and A&W, YUM! planned to aggressively pursue additional multi-branding strategies. In 2003, the company acquired the rights to the Pasta Bravo brand and planned to pair it with Pizza Hut.

YUM! also focused on international expansion, eyeing China, the United Kingdom, Mexico, and Korea as key growth markets. KFC had become China’s leading brand, opening the country’s first drive-thru in Beijing in 2002. Overall, there were 800 KFCs and 100 Pizza Huts in China, and during 2003 Taco Bell made its debut. A&W also experienced a first—it went international with the establishment of a restaurant in Hanover, Germany.

While exposure in the international arena was crucial to the future growth of Yum!, its presence in certain areas left it subject to criticism and violence. A KFC in Pakistan was set on fire by an angry mob protesting the U.S. bombing of Afghanistan in 2001. In June 2003, chairman and CEO David Novak became the target of a demonstration held by the People for the Ethical Treatment of Animals (PETA) in Germany. PETA had recently launched a campaign against KFC and Yum! claiming that the animals purchased for its restaurants were abused and treated in an inhumane fashion. A protestor at a KFC took PETA’s actions a step further and soaked Novak with fake blood and feathers.

Nevertheless, Yum! remained dedicated to international expansion as well as its multi-branding strategy and customer service goals. Under Novak’s direction, the company planned to open 1,000 new international units per year and at least 400 multi-branded units in the United States each year. While domestic competition remained fierce in the early years of the new century, Yum! appeared to be on track for significant growth in the years to come.

Principal Subsidiaries

Pizza Hut Inc.; Taco Bell Corporation; KFC Corporation; Long John Silver’s Restaurants Inc.; A&W Restaurants Inc.

Principal Competitors

AFC Enterprises Inc.; Doctor’s Associates Inc. (Subway); McDonald’s Corporation.

Key Dates

1952:: Harland Sanders establishes his first franchise.
1958:: Pizza Hut is founded by brothers Dan and Frank Carney.
1962:: The first Taco Bell location opens.
1977:: PepsiCo purchases Pizza Hut.
1978:: PepsiCo acquires the Taco Bell chain.
1986:: Kentucky Fried Chicken is added to PepsiCo’s arsenal.
1997:: PepsiCo spins off its restaurant holdings as Tricon Global Restaurants Inc.
2002:: Tricon changes its name to Yum! Brands Inc.; the company acquires Long John Silver’s and A&W All American Food Restaurants.