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Yum Brands, Inc.

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This work analyse Yum Brands, one of the major and leading companies in the global quick service restaurant (QSR) industry. Through some tools the author has examined deeply this fast food firm regarding the internal situation (SWOT), the external environment (PESTEL) and the stakeholders involved in the industry (Porter’s 5 Forces) key words: Yum Brands, PESTLE, SWOT, Porter’s 5 Forces, QSR, fast food, China

Yum Brands, Inc. is a U.S. company headquartered in Louisville (Kentucky), and is a world leader in the quick service restaurant (QSR) industry with more than 39.000 stores in over 130 countries (YUM, 2013a). Yum was created on 7 October 1997 , under the name Tricon Global Restaurants after the split from PepsiCo. In March 2002, they acquired the Yorkshire Global Restaurants, based in Lexington (Kentucky), bringing into the family also Long John Silver’s and A&W Restaurants. The acquisition of Yorkshire is effective on 7 May 2002 and next 16 May, the group formally changed its name in Yum Brands, Inc. In 2004 the company founded the chain East Dawning selling products of Chinese cuisine with the business model of fast food. The group owns the following restaurant chains: Pizza Hut, Kentucky Fried Chicken, Taco Bell, East Dawning and Wing Street (Reuters, 2013a).

A PESTLE analysis is a tool to review the macro environment or external forces, outside the company’s control, that can affect the business plans and future projects. PESTLE stands for Political, Economic, Sociological, Technological, Legal, and Environmental. The PESTLE analysis can help a company to change direction, identify new potential opportunities and it is considered one of the most useful tools in the strategic decision making (Strategic Planet, 2013).

The big firms of the QSR market have to adhere to the requirements imposed by the local government, such as the minimum wage, which can affect the costs and corporate profits. For instance, Yum’s operations are highly affected by the countries policies enforced by local governments, like in the Chinese Market (PwC, 2013). Also, the national governments may drive the companies to promote healthier products and requires companies to publish the ingredients and caloric composition of the food served in their stores (BBC, 2011). Due to many local Governments are highly concentrated on health implication on eating fast food (Inthenews, 2007 ; BBC, 2007), Yum has been constrained to respond to this health concerns by introducing dishes like salads and lighter dishes (The Economist, 2005).

Although consumer confidence had been badly influenced by the recession of 2008, the number of the customers and their average expenditure in the Yum and its competitors are increased due to low prices (The Economist, 2010). Also, Yum, with all its brands, beat the post-recession effects by adding to its very low and competitive prices, many offers and promotions and focusing on marketing and advertising (Romeo, 2010). The firm, due to the continuous fluctuation of the raw materials rate, with a consequent raise of the costs, decided to increase the recycling to be less reliant on virgin raw materials (SEC, 2013). Social

The increasingly growing awareness by customers regarding healthier lifestyle due to the great deal of emphasis focused on healthy eating in many countries, such as U.K., since Jamie Oliver started his healthy food campaign (Inthenews, 2007) or when the Food Standards Agency (U.S) decided to ban the “Junk Food” adverts during television programmes aimed at young (BBC, 2007), led Yum to introduce and promote more options about healthy food (The Economist, 2005).

Technology is vital for competitive advantage, is the major driver of globalization and also is changing the way how businesses operate. Internet is having a profound impact on the marketing mix strategy of organizations and the fast food firms are quickly adapting by using social networks and website to meet the needs of the more and more technology-familiar customers. Yum understood the potentiality and the impact on its business brought by innovation technology, and is considered one of the world’s most innovative companies (Forbes, 2013). Also, the firm spends part of the budget in learning technologies, with the dual purpose to build people capability (Yum, 2012d) and, over the next few years, to reduce the paper-intensive training system currently used in its restaurants (Yum, 2008)

There may be a number of laws and regulations constraining the activities of fast food firm, such as business hours, taxation and national minimum wage which can make it difficult for the business to operate properly. Also, the firms must meet the food standards enforced by some governmental organizations like the FDA (Food and Drug Administration) in U.S. With regard to bureaucracy, for a company like Yum which operates in a local and overseas markets, it is very important to have an action plan to forecast and anticipate the future possible constraints that might delay or stop the activities of production. Before to open any business, the firm must contact the business license department to find out about getting a business premise licences which essentially grants the right to operate the business and contact the local offices to register with them.

Environment is one of the most important factors to take into account (and probably the more deeply felt by the people). Environmental and sustainability issues are a vital element in the hospitality system (Getz, 2005). According to Swarbrooke (2002), due to a considerable increase in public awareness in green issues, the restaurants must be seen to be environmentally friendly to their potential visitors. For instance, due to the higher demand of beef-burger the producer need more beef production areas and for that every year many square kilometers of rainforest are destroyed (Botterill and Kline, 2007). The recognition of this kind of environmental threats has created a marketing opportunity for the green products, which are promoted to customers who are concerned about the environment and give the opportunity to the firms to gain customer loyalty.

SWOT Analysis is a tool used in a business context for understanding Strengths and Weaknesses and for identifying Opportunities open to the firm and the Threats it has to face (Mind Tools, 2013).

Yum has, as one of its major strengths, the scale in the global market and it is a well-known company, with KFC and Pizza Hut recognized by most people in the world. Also, the portfolio diversification brings the company to decrease most of the risks associated with the business and to increase the size of the business itself, even in a financial downturns. Constant national and overseas growth with over 2000 store opening in the 2012, especially in India and China with a 5-year compound annual growth rate respectively of 21% and 17% (YUM, 2013b) World largest restaurant company with nearly 40.000 restaurants in more than 120 countries (Fool, 2013) Pizza Hut, KFC and Taco Bell are leaders and well recognized brands respectively in their respective categories (pizza, chicken and Mexican food) of the quick service global market (Wikinvest, 2013) 13% EPS (Earnings Per Share) during last year (Reuters , 2013b)

The lawsuit against Taco Bell about the seasoned beef in the tortilla was not enough beefy (only 35%) to be called beef has been considered as a heavy financial weakness for the whole group (NPR, 2011). Also, most of the products present in the KFC food menu are seen as unhealthy and of poor quality (Global Times, 2013). Yum could improve its brand image by offering different menu with healthier options and providing a better service. Yum’s store sales drop slows in the Chinese market due to the avian flu (Bloomberg, 2013) Low performance in the U.S. market, particularly with KFC (YUM, 2013b) Few shares to conquer in the oversaturated U.S. fast food market (The Economist, 2010)

Yum has still great margins for improvement in terms of global market and especially in China, where to adapt to the different Chinese market they have founded East Dawning (The China Observer, 2010), offering Chinese cuisine and allows the company to continue to grow in this country and patronize the customers. Regarding the internal market they should improve their offer and service. Grow up steadily and continuously in China through M&A (Mergers and Acquisitions) and favoured by low labour and raw material cost (Deloitte, 2012). Make more investments in a potentially profitable market such as India, forecasted as the country with the largest consuming class in the world (YUM, 2013c) Introduced its brand before the competitors in France, Germany, Russia, Africa (YUM, 2012a) Improve the presence of healthy options in the menus, particularly about the most sensitive categories (children), as its major competitor McDonald’s (Syracuse, 2011)

The main threat comes from McDonald’s, which has successfully introduced more nutritious and healthy options in the menu (Syracuse, 2011). On the contrary, many of the products served by KFC are seen as unhealthy due to the presence of fried chicken resulting in a negative impact on sales (Global Times, 2013), and after the bad publicity due to the salmonella poisoning (Financial Post, 2012) Food safety: Avian Flu, SARS, E coli. do not allow the full potential in terms of sales due to negative advertisement (YUM, 2013c) Concerns about nutritional value and the bans on trans fats (The Economist, 2005) Close dependence on the Chinese market, due to the large sales(for instance KFC makes in China almost of its total share), makes the company vulnerable to any eventual and consistent changes in that market (China Hush, 2012) Variations in foreign currency exchange rates and different government laws and regulation in foreign countries, such as the China, can heavily affect the company’s profitability, respectively with sales and higher tariffs to pay (Euro Investor, 2012 ; China Briefing, 2012) High competition from other brands in a saturated and easily accessible U.S. market (Value Investing Center, 2010)

This model was introduced in 1979 by Michael Porter and used by most companies, organizations and sole traders for industry analysis and corporate strategy development. This model analyses industry rivalry, buyers, suppliers, potential entrants and substitutes (Business Dictionary, 2013).

Industry Rivalry
Due to the fact the Industry Rivalry in the QSR is highly competitive, the major firms invest a consistent part of their budget in R&D (Research and Development) to differentiate their products and meet the customer’s needs. Although Yum is trailing behind McDonald’s Corporation in terms of market share, it dominates the Chinese QSR market (Rappeport, 2013). In the internal market (U.S.), with a large number of different QSR, Yum faces a highest competition, due to the concentration of the market which enhances the industry rivalry. Different situation in China, where KFC is the first QSR to enter into that market (and continues to be the number one brand) and Pizza Hut is the first restaurant chain to serve pizza, Western casual dining, and pizza delivery in that country. Due to these facts, it is possible to realize that there is less competition in the quick service sector in the Chinese market.

Buyer Power
The price is one of the main factors which can affect the choice of the fast food restaurants, when the customers value the food and how much they want to pay for (Yuncu et al., 2013). Most likely, if a restaurant is overpriced, compared to its competitors, it will lose customers and that leads to the conclusion that there is, to some extent, a buyer power in the QSR market. Also, according to Muhlbacker et al. (1999), “the competitiveness of the market can increase buyer power and customers are price sensitive when there is a no switching cost between competitors”. Yum’s customers can easily switch to a competitor with a no extra cost, especially in the U.S. where there are over 200.000 QSR (Franchise Help, 2013). For instance, Yum’s approach should be more sensitive (not overpriced food) in the new overseas markets to avoid the customers could come back to a previous QSR (Harvard Business School, 2013).

Supplier Power
The supplier power can determine the food commodity costs, but the volatility of this latter can tie down the power to price the commodities (IFPRI, 2011). Yum has implemented a Supplier Tracking and Recognition System” (YUM, 2012b), to set up and continuously monitor quality and safety suppliers: only those that reach a certain level of standards are rewarded and stimulated to compete with other suppliers (Delfield, 2013). The supplier power, within a large scale restaurant market, is very low due to there are many food and beverage suppliers that Yum can collaborate with (YUM, 2012c); therefore, commodity prices must be kept competitive and relatively low, otherwise a company like Yum can opt to replace those suppliers who are considered too expensive or those who do not meet the essential standards of quality and safety (The Wall Street Journal, 2013)

Threat of Substitutes
The presence in the QSR industry of so many firms (with a non-existent switching cost) and almost similar food options leads to have a very high threat of substitutes. On a limited market scale, Yum, due to the outstanding quality of food and service, can be the leader even if its products have many substitutes and the customers can easily switch to competitors. Vice versa on a large scale, the customers have two opposite options: 1)decide to pay a little bit more for a better food quality in more expensive restaurants; 2)choose to cook at home to save money. Obviously both options are affected by the actual economy and the customers’ willing to spend on food. Also, customers may opt for what they believe could be a healthier and safety food.

Threat of Mobility
The entry of new potential competitors has two important and conflicting assumptions: 1. the QSR industry has a low number of potential entrants in a market already shared by the major firms, which have accrued experience and advantages to create barriers to the entry of new potential competitors. 2. entry in the QSR industry is not very difficult as the main barrier is the capital needed to build or refurbish a new store (further costs derive from food, beverage and labour). After these assumptions, it is possible to deduce that Yum has consistent advantages from the economies of scale in supply, advertising and during the years an outstanding leading reputation has been gained. All these factors, besides the fact Yum can offer the level of quality expected by the customers, give the company the opportunity to enter into any given location and market. Regarding new overseas markets, Yum may face some barriers to entry due to a lack of experience, reputation and also the different local habits and tastes. For instance, Yum to enter into the Chinese market and contend it to the traditional local restaurant has developed East Dawning, a brand of Chinese style dining (The China Observer, 2010). Also, great importance must be given to the government laws, regulations and limitations which can be seen as barriers to entry (iStock Analyst, 2008).

The value chain analysis is a tool for working out how to add value to the raw materials (input), through the manufacturing process, and sell them converted into a finished product available to the end-users (output). Also, the companies must achieve the goal to add as much value as they can with the lowest possible cost (Investopedia, 2013). Yum offers in its stores different type of cuisine and, consequently, food preparation (pizza in Pizza Hut, chicken in KFC, Tex-Mex in Taco Bell, etc.). Even if Yum is a multi-branding company and has a portfolio differentiation (in terms of kind of cuisine), all the main activities involved in the manufacturing, distribution and final sale use a common business model, and consequently the inbound/outbound logistics, marketing and sales, operations and service are almost the same (Zacks, 2013). For instance, regarding the food preparation, many ingredients used in the different company brands are identical and therefore the manufacturing process is (almost always) interchangeable among the different kind of cuisines.

Even if there are some exceptions, such as regarding the service offered in the different brands (i.e. Pizza Hut favors and promotes more the eat-in than delivery), overall the marketing, food preparations and all the other main activities of the different brands are related through the Yum’s value chain system. Despite the presence, in the owned and franchise store, of corporate standards and the continuous monitoring for enforce them, the value chain analysis has as its biggest barrier the partial or total lack of communication and coordination across the different brands, restaurants and even within the different divisions of the same store during the operational activities. The Yum struggles to solve the issue of the communication among the different divisions, concerning for example human resources management and technology development, due to the fact that these latter are managed by themselves and not by headquarters. To summarise, the main core activities across the various divisions have many common points, which lead Yum to have more advantages and benefits in the scale economies. However, many of these advantages and benefits are wasted due to the excessive independence of each division and, as said above, the not perfect internal communication which leads the firm to do not reach its full potential.

About the future of Yum, it is easy to forecast that the company will continue to expand into the overseas markets and increase its share in the QSR industry. Even if the company has some difficulties to improve its market share and earnings in the U.S. market, from the financial point of view the company is considered healthy (Investing Business Week, 2013), despite the recent troubles in China (BBC, 2013) and it is able to maintain in the future its role of primary importance in the global fast food industry. Even if this latter has a very competitive rivalry and a high-turnover, Yum is identified as one of the global market leaders and can be considered as a marketing model to follow, for all those fast food firms which plan to introduce their brands into the overseas markets.

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