Why Yum! Brands' Decided To Sell It's KFC Business In India

Author's Avatar
Nov 29, 2014

Yum! Brands (YUM, Financial), the owner of KFC, Pizza Hut and Taco Bell, has been in India for more than a decade. The fast food chain has more than 700 locations in the nation. But recently Yum! was reported considering to sell of its KFC business in western India. Its decision to put its KFC business on the block is a bit surprising as starting this year, the company expressed its plans to expand operations in the country and widen its reach by entering into new cities by way of both owed restaurants and through running franchise.

By opening new stores, Yum! has tripled the number of outlets in the country over the past three years. It’s not over yet. The company targets to triple the count to more than 2,000 stores by 2020. In fact KFC helped Yum! edge closer to its archrival McDonald’s (MCD, Financial) and is heading to top the quick service market segment. Back in 2011 Yum! has only 155 outlets compared with McDonald’s with 240 store units. But the expansion of KFC outlets assisted in narrowing the gap. Currently there are 305 KFCs in comparison to 350 McDonald’s. It also poses a threat to McDonald’s of capturing its market share by barging into its territory.

So if Yum!’s position looks so good, then why is the company thinking of selling it away?

03May20171244451493833485.jpg
Picture from Yum! Brands India

What’s wrong with KFC?
Yum!’s quarterly same store sales dropped for the fourth time in a row from June to September. Increasing food prices and reducing discretionary spending is taking a toll on the footfall of the stores and corroding Yum! top and bottom lines. And Yum! is not the only fast food outlet, other quick service restaurants are also feeling the heat. McDonald’s, Domino’s Pizza (DPZ, Financial) that runs 772 outlets, Subway with close to 500 outlets, and others are also a victim of food inflation and curbed consumer spending. Despite such market challenges, Crisil Research expects the market to expand and more than double by 2018.

Yum! directly operates 18 outlets in the western part of the country. Yum! wants to sell of KFC to reduce real estate costs, rent, staff cost and several other overhead charges to boost its profit from the Indian market. In the quarter ended September, Yum!’s system sales in this developing market improved 14% which is attributable to the 26% per unit growth. But same-store sales performance was dismal as it fell 4%. The company recorded an operating loss of $3 million. Though menu prices were kept low and Yum! had provided value meals, it wasn’t enough to attract customers who have been cutting their budget on discretionary spending.

03May20171244461493833486.jpg
Picture from Yum! Brands India

Other players also got hit
Jubilant Food-Works, which has been granted the exclusive franchise of other fast food chains such as Dunkin’ Donuts (DNKN, Financial) and Domino’s Pizza, also experienced a 5.3% decline in same store sales in the quarter ended September. In comparison, last year it reported a same store sales gain of 6.6%. Its net profit also tumbled 12.7%, thanks to its flattish revenue growth coupled with increased expenses.

Hardcastle, which operates McDonald’s restaurants in the western and southern region of the country, registered a fall of 7.9% in same store sales for the July-September period. In the year ago period, it had reported a gain of 5.5% for the same metric. Costa’s Coffee, which is a U.K. based café chain run by Devyani International, was also not spared. In fact it shut down 15 to 20 loss making units in the past one year. The café chain is focused on running profitable outlets only.

The plan going forward
Yum! is one of the fastest growing fast food restaurant chains in the Indian economy. The company stays committed to its Indian operations. Operating through local entrepreneurs is more cost effective in this market, so presently Yum! is looking out to strike a balanced ratio between owned restaurants and franchised outlets. This will optimize the American company’s cost model and help maximize profits while offering customer delight.