RETAIL: KFC Gets New China Head, Investors Eye Spin-Off

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Bottom line: Yum’s new leadership change marks the start of a new period of sustained same-store sales growth for KFC  in China, which could include a spin-off of the company’s China business over the next 2 years.

Yum names new China head

Market wisdom often says that China is too big to ignore for most multinationals, despite the market’s complexities and many restrictions. Now a new trend is emerging that says China is too big and complex to be run as part of a company’s bigger global operations, and needs to be split off into a separate unit for major global firms.

That’s the interpretation some are making following Yum Brands’ (NYSE: YUM) naming of a new China chief, and growing speculation that the parent of the KFC and Pizza Hut chains will spin off its China business into a separate company. In this case, Yum’s naming of Micky Pant as CEO of Yum Brands China comes as KFC is in the midst of a major overhaul for its largest market outside the US.

KFC has struggled in China for much of the last 2 years, first after many consumers abandoned its restaurants during a bird flu outbreak in 2013 and then last year after one of its major suppliers landed in the middle of a food safety scandal. At a bigger level, KFC was also suffering from brand fatigue as it had done very little to change its image in China since becoming the first foreign fast-food chain to enter the market in 1988.

The company saw some of its biggest growth in the 1990s and first part of the 21st century, and outgoing China chief Sam Su helped to lead much of that during his 26 years at the company. But his retirement now seems aimed at bringing new life to KFC’s China operations, which was previously company’s largest profit engine and one of the main drivers for Yum’s stock before the recent woes of the last 2 years.

Yum CEO Greg Creed previously said that resuscitating his company’s China operations was his top priority, and In an interesting footnote the new announcement of Su’s departure also says KFC’s same-store sales have turned “significantly positive”. (company announcement; English article) That would reverse a different trend of steady same-store sales declines over the last 2 years, including a 10 percent decline in this year’s second quarter. (previous post)

Turning a Corner

Based on all that, Su’s departure certainly looks timed to bring in some new leadership now that the company has turned a corner in China and may finally be poised to return to a longer term growth track. But it’s also worth noting that after 2 years of steady declines, the company’s China sales now are probably sharply lower than where they were in 2013, and thus it becomes easier to post same-store sales growth.

All of that brings us to the other question, of whether this leadership change could be laying the groundwork for Yum to spin off its China operations as a separate company that could be listed separately in Hong Kong or even China. Reports after the management change was announced say Yum denied any such a spin-off was being planned in conjunction with the move.

Some shareholder activists are reportedly interested in such a spin-off, though no big names have started to lobby strongly for such a move yet. Such a spin-off does seem to have a certain logic, as it would give Yum’s China managers more flexibility to run their own operations. It would also provide a separate listed company to track performance in this large and relatively unique market. Hired car services giant Uber has done something similar recently, in a nod to the market’s big size and complexity. (previous post)

A spin off and subsequent listing in China or Hong Kong would also allow Chinese investors buy into the KFC China story — something that could benefit the company’s local image and also its stock. At the end of the day, this new management change certainly seems to mark a symbolic new start for KFC in China. Su’s departure comes as the many changes he has launched in China over the past year are finally yielding some results, and  it’s quite possible we could see KFC finally return to sustained growth and launch a China spin-off over the next 2 years.

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