Yum brands to spin off Chinese operations

Yum Brands is to spin off and list its Chinese operations in the biggest shake-up the company behind Kentucky Fried Chicken has seen in almost 20 years, a move that comes just days after it appointed activist investor Keith Meister to its board.

Newly formed company Yum China will become the sole franchisee for Yum Brands in the world’s second-largest economy, with exclusive rights to KFC and its other two fast-food chains Pizza Hut and Taco Bell, with the latter yet to enter the country. Yum shares rose 3.6 per cent to $74.30 in morning trading.

Investors had been expecting radical change at Yum, whose Chinese business accounts for about half of group operating profit.

Meister’s fund had built up a near-5 per cent stake in the company and earlier this year called for the company to split off its Chinese business.

It has been a tough year for Yum in China.

While its KFC brand was beginning to show signs of recovery after food scandals last year, it was not at the pace that the company had been anticipating, dragged down in part by the country’s economic slowdown.

Marketing miscues at Pizza Hut have also weighed on sales in China, contributing to a string of earnings downgrades in recent months.

“I am tempted to say that KFC’s best days in China are probably behind them. They are dealing with a lot of tough trends,” said James Roy, analyst at China Market Research in Shanghai.

These challenges include rising labour costs and rents, labour shortages, changing consumer tastes and increasing competition.

Yum, however, believes that growth in the middle class has a long way to run and that its restaurants in the country could increase in number to 20,000, from 7,000 now. The business generates about $1bn in annual cash flow, half of which is used for opening new outlets and capital investment.

“Yum is taking an important step in establishing the right corporate structure and capital structure to maximise long-term shareholder value,” said Meister.

Activist investors have played a critical role — sometimes welcomed but often not — in the upheaval at American food and beverage companies during the past few years, pushing for cost cuts and greater efficiency. Earlier this year Bill Ackman’s Pershing Square built up a 7.5 per cent stake in international snacks company Mondelez.

For Yum, the move marks its biggest change since it was split off from PepsiCo in 1997.