Yum Extends Global Reach

By Julie Jargon

Firm plans to become leaner at same time, shifting restaurants to more franchisees

Yum Brands Inc. plans to broaden its global reach with thousands of new restaurant openings in the next several years as it shifts more restaurant ownership to franchisees.

The company currently opens a new KFC every eight hours, but Chief Executive Greg Creed told investors the company can open one every five hours going forward. Pizza Hut opens two restaurants a day now in overseas markets and plans to open three a day by 2020.

The international expansion comes as Yum plans to become a leaner company operating fewer of its own restaurants after it spins off its volatile China business next month.

The company now owns 10,000 restaurants, which will fall to 3,000 when the China business becomes its own stand- alone company. Yum plans to raise the percentage of restaurants owned by franchisees to at least 98% by the end of fiscal 2018, up from 77% now. The China spinoff alone will boost that figure to 93% because the China business will license the brands, paying Yum an annual royalty fee. By the end of fiscal 2018, Yum will own just 1,000 restaurants, making it one of the most-franchised U.S. restaurant companies, behind only Burger King parent company Restaurant Brands International Inc. and Dunkin Brands Group Inc., which are each nearly 100% franchise-owned.

Many restaurant brands have been moving to a so-called asset light structure in which they own the brands but not the actual restaurants. The model allows restaurant companies to shoulder less risk and volatility because they can collect a stable revenue stream in the form of a percentage of franchisees’ sales. Burger King, McDonald’s Corp., Wendy’s Co. and other major chains have been selling more of their company-owned restaurants to franchisees.

Mr. Creed said the move to a more franchised business model represents a “mind-set shift” from thinking of Yum as a brick-and-mortar business to viewing it as the steward of three global brands. “We will be much more focused,” he said.

The company also announced plans to reduce its annual capital expenditures to about $100 million by the end of fiscal 2019 from $500 million and to reduce its general and administrative expenses by about $300 million by the end of fiscal 2019. General and administrative expenses as a percentage of sales will drop to 1.7% from 3.4% after the cuts, the company said.

As part of the cost-cutting, Yum plans to eliminate 600 corporate positions globally by the end of the year through attrition, voluntary retirement, some involuntary layoffs and the sale of restaurants to franchisees. An additional 1,500 jobs will be eliminated by the end of 2018.

Yum, based in Louisville, Ky., last month struck a deal to sell part of its China operations to a prominent Chinese deal maker and the financial affiliate of Chinese internet company Alibaba Group Holding Ltd. Primavera Capital, run by former Goldman Sachs Group Inc. Greater China Chairman Fred Hu, and Ant Financial Services Group will buy a combined $ 460 million stake in the Yum China Holdings Inc. spinoff. The China business will begin trading separately on the New York Stock Exchange on Nov. 1.

Yum built KFC into China’s most popular fast-food chain after entering the country in 1987. The company in recent years has faced increasing competition from foreign and local fast-food rivals in China as well as numerous food-safety scares, which resulted in volatile sales.

Write to Julie Jargon at julie.jargon@wsj.com

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