3 Big Questions for the New Yum China Spin-Off (KFC, Pizza Hut)

Jeffrey Towson asks the big questions in the wake of the decision to spin off one of the biggest food franchise success stories in China

PUBLISHED : Wednesday, 21 October, 2015, 8:48am
UPDATED : Wednesday, 21 October, 2015, 3:33pm

So Yum China is being spun-off. A reasonable move that should give them increased focus. But what happens after the spin-off is much more important. And I have three questions about that.

#1 - Who is the new Sam Su?

Yum’s success in China was not because of its franchise. There are hundreds of franchises. It was overwhelmingly because they got to China early and had great management.

That great management was former China CEO Sam Su (and his team). He is a native of Taiwan and was a veteran of Proctor & Gamble Taiwan. He also came to KFC China early in his career and committed for the long-term. That is what you are looking for in the head of Yum China.

I believe Sam is now 62 years old. And I believe his replacement Micky Pant is 60 years old. Explain to me the logic of replacing a retiring 62 year old CEO with a 60 year old? And a 60 year old with no China experience that I can see. So no offense to Micky Pant (who I’m sure is a nice guy) but I’m assuming he’s a caretaker or transitional CEO.

So my question is who the new Sam Su? Who is the China expert who will revitalize and grow this company for the next 10 years?

#2 - What happened to Sam’s successor?

Sam retiring wasn’t a surprise. He had been there for decades. I’m assuming he had a successor in place who was ready to take over. What happened? Why didn’t Joey Wat or Peter Kao take over?

In the last day, Yum has used the phrase “overwhelming Chinese management” to describe the new Yum China. That’s a curious phrase. I’d like to know who Sam designated as his successor (or possible successors) and why a normal succession didn’t happen. To an outsider, this appears bungled.

#3 - Are they going to franchise the China outlets?

Most of the China outlets are owned. Franchising new outlets could accelerate growth. While Yum’s 6,900 China outlets is a lot, it is small for China. You could have 3-4x that number. Franchising would get you there faster.

But franchising decreases operational control. That has big implications in general. And it is a real concern in a country rife with food safety issues.

Another idea is to franchise the existing outlets. That would really move the needle financially. It would free up a lot of capital, get the employees off the payroll and spike the return on equity.

Note: This is exactly what 3G Capital has done since acquiring Burger King. They shifted to franchises and have more than doubled their earnings in a few years. However I believe the China Burger King franchise is still under a master franchise agreement with Cartesian Capital in New York. So this may be mostly a non-China story.

Anyways, I wouldn’t be surprised if the activists bring up franchising almost immediately.