Why Did Yum Brands Spin Off Its China Division? An In-Depth Look
Yum Brands, owner of popular fast food chains KFC, Pizza Hut and Taco Bell, made a pivotal strategic decision in 2016 to spin off its highly valuable China business into an independent, publicly-traded company called Yum China Holdings. This article will examine Yum‘s impressive China success story, why the spin-off occurred, how it was enacted, and the performance and benefits realized by both companies since separating.
Yum‘s Rapid China Expansion
Yum Brands began its expansion into China back in 1987 by opening a KFC restaurant in Beijing, marking the first major American fast food chain to enter the region. Over the next few decades, Yum aggressively grew its restaurant footprint by opening new KFC and Pizza Hut locations at a rapid pace.
According to Yum‘s 2015 annual filing, the company was opening approximately 6 new restaurants per day in China. Through both company-owned stores and franchises, Yum‘s restaurant count and sales in China consistently grew by double-digit percentages year-over-year.
By 2016, Yum‘s China division had over 7,100 restaurants and was generating more than $6.9 billion in sales revenue annually. To put this in perspective, Yum‘s China business accounted for $1 out of every $3 of Yum‘s global revenue, while USA revenue was only $1.2 billion.
Clearly, China was the most significant growth market and profit driver for Yum Brands in the years leading up to the spin-off.
| Yum Brands Key Operating Metrics | 2012 | 2013 | 2014 | 2015 |
| Revenue – China Division | $6.9B | $6.8B | $6.8B | $6.9B |
| Revenue – USA | $1.0B | $1.1B | $1.1B | $1.2B |
| Net Income – China Division | $1.1B | $1.1B | $1.1B | $1.0B |
| System Restaurants – China Division | 5,400 | 6,000 | 6,900 | 7,100 |
Strategic Rationale for the Spin-Off
In October 2016, Yum finally decided to spin-off their entire China operations into a separate, independently publicly-traded company called Yum China Holdings. This strategic move was undertaken for several key reasons:
Gain Capital for Reinvestment and Growth
Becoming an independent entity allowed Yum China to raise its own capital by being publicly listed, rather than being part of Yum. This provided access to crucial new funds that can be used to accelerate expansion and gain market share in the rapidly growing China restaurant industry.
According to Credit Suisse analysts, the spin-off could enable Yum China to open up to 15,000 new restaurants in China, while it was only able add 1,000 stores annually as part of Yum.
Optimize the China Business Model
As a standalone business, Yum China can be more flexible and competitive against local restaurant chains rather than being weighed down as part of a large, global conglomerate. Yum China is free to modify its menus, branding, and marketing specifically to cater to Chinese consumers instead of conforming to Yum‘s global requirements. Its management team can also be fully localized.
According to Rutgers Business School Professor Sue S. Cha, "their success did not come from headquarters in the U.S. It really came from the ground efforts in China. This move recognizes that."
Corporate Governance and Management Focus
By separating the China division, both companies can focus on corporate governance practices tailored for their markets. Yum China now has an independent board of directors and executives solely focused on Chinese operations and no longer has to compete for attention with Yum‘s other global business units.
Optimize Tax Structure
The spin-off allows Yum China to implement the optimal tax planning strategies for doing business in China and escape the higher corporate tax rate in the U.S. This provides major financial savings that can be funneled back into the business.
"Tax benefit was another consideration that further made the spin-off appealing," says Cha.
How the Spin-Off Was Structured
The spin-off was executed through a pro-rata distribution of Yum China‘s stock to existing shareholders of Yum Brands. For every share of Yum stock held, Yum shareholders received one share of Yum China stock.
This enabled a tax-free spin-off for investors. Yum China began trading on the New York Stock Exchange under the ticker symbol "YUMC."
Yum China took ownership of Yum‘s China assets including all KFC, Pizza Hut and Taco Bell brands and locations in mainland China and Tibet. Yum China is headquartered in Shanghai.
Despite the separation into independent companies, Yum Brands still owns 4% of Yum China‘s shares and receives royalty fees from Yum China for licensing its brands.
Performance Since the Spin-Off
In the few years since the spin-off, Yum China has shown the strategic rationale behind the separation to be sound. The company has achieved rapid growth and strong financial performance as it focuses in on the Chinese market. A few highlights:
- Grown from over 7,000 stores in 2016 to over 9,400 stores today, making it the largest restaurant company in China
- Same-store sales growth of 4% in 2019, on top of a 5% increase in 2018
- Total revenues increased 9% in 2019 to over $8.4 billion
- Opened over 1,000 new stores in 2019 alone
- Digital sales mix reached 15% of sales in 2019, from less than 5% pre-spinoff
Yum China has used capital raised to invest in digital innovation, supply chain logistics, exciting new retail concepts and menu offerings tailored specifically to Chinese consumers.
Meanwhile, the spin-off has also allowed Yum Brands to focus more wholly on emerging markets like Africa as well as growing its Taco Bell, KFC and Pizza Hut brands globally outside China.
Both companies credit the spin-off with fueling their growth.
The China Growth Story Continues
Since becoming independent in 2016, Yum China has continued its rapid ascent, establishing itself as the undisputed restaurant leader in China while benefiting from being a locally-focused company. Yum China plans to reach 20,000 locations by 2022 and potentially triple the size of the iconic KFC brand within China, showing plenty of room for growth remains.
As Julien Lagubeau, Chief Operating Officer of Yum China stated, “We are focused on the long term with confidence in the continued growth runway of the China market.”
The spin-off has been praised by analysts and appears to have unlocked value, performance gains and long-term growth trajectories for both Yum Brands and Yum China Holdings as they intensify their focus on their core markets.