RETAIL: Yum China Eyes HK Listing, Taco Bell Return

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Bottom line: Yum’s plan to potentially list its China unit in Hong Kong, alongside a concurrent New York listing, looks like a smart move that would make the stock more accessible to Asian investors and give it a more local flavor. 

Yum eyes HK listing for China unit

The struggling China unit of Yum Brands (NYSE: YUM), owner of the KFC and Pizza Hut chains, has just released a slew of new details on its prospects, including a long-awaited return to same-store sales growth after several years of declines. The announcement comes as Yum, under shareholder pressure, prepares to spin off its China operations into a separately listed company.

Apart from the new forecast for a return to same-store sales growth, one of the most interesting China-related details in the new announcement is the potential for a Hong Kong listing by Yum’s China unit as part of the spin-off. That move would make Yum China’s shares available to many mainland Chinese investors, and would also add a distinctly Asian flavor to a company that has now seen as a downscale purveyor of greasy western fast food.

A second interesting element of the new announcement is Yum’s disclosure of big plans for a global expansion of its Taco Bell Mexican food chain, which could include a return to China. Yum previously experimented with Taco Bell in China, launching at least one store in Shanghai. But the move didn’t prove too successful, and Yum later quietly ended the experiment.

The latest announcement began with the headline news that Yum would return $6.2 billion to shareholders as part of the bigger, previously announced plan to spin off its China business. (company announcement; English article; Chinese article) That same announcement includes word that Yum is aiming to spin off and list the China unit by the end of next year.

Everyone had always assumed the new Yum China would be listed in New York, where Yum itself is currently listed. So the company’s disclosure that it is also considering a dual listing for the China unit in Hong Kong is new, and seems like a good strategic move. That’s because Hong Kong is well situated to attract Asian investors, and is one of the few places in the world where mainland Chinese can buy international stocks with relative ease.

A Hong Kong listing for the company also looks like a good move from a branding perspective. Yum’s core KFC and Pizza Hut brands look distinctly American to many Asians, and their image for cheap, greasy food doesn’t exactly add to their appeal. Thus a listing in Hong Kong would give the company a distinctly Asian flavor. Such a move would follow a similar path followed by big screen movie giant IMAX (NYSE: IMAX), which recently spun off its IMAX China (HKEx: 1970) operations into a separate company that listed this year in Hong Kong. (previous post)

Return to Growth

Next there’s Yum’s forecast for a return to same-store growth for its China stores in December, which would end a cycle of contraction for much of the last 2 years. Yum actually didn’t predict definite growth, but reiterated its previous forecast that same-store sales in China would range from flat to up as much 4 percent in December. That would reverse an estimated 3 percent decline in November.

Perhaps most significantly, Yum said same-store sales for its KFC chain, which make up the bulk of its China operations, would finally return to growth in December. It predicted KFC stores in the country would grow by an unspecified amount this month, reversing a 1 percent decline in November.

KFC in China has been hurt by a number of factors over the last 2 years, including several food safety scandals, a bird flu outbreak that scared off many customers, and a general fading of its image. It is trying to revive its prospects with a major brand relaunch, which includes a number of moves aimed at trying to position itself as more upscale.

Last but not least there’s the Taco Bell development, which could provide a fresher and newer growth engine for Yum in China. The Taco Bell China plans were again part of a broader announcement that saw Yum say it wanted to expand the number of its non-US Taco Bell outlets to 1,000 by 2020, up from about 280 now.

An executive said in an interview that Yum will probably test out its first Taco Bell in China next year, but didn’t provide any additional details. (English article) As a big Mexican food fan and someone who dined at the original Taco Bell in Shanghai, I can say authoritatively that Yum will certainly face a challenge attracting Chinese consumers to this particular cuisine. But that said, marketing is equally important with this kind of move, and a better-conceived campaign to localize the brand might help Taco Bell to perform better during its second foray into China.

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