Yum - Fast Food Case Study

1. How well have they performed financially during the 1985-1990 and 2000-2004 periods? Show your financial analyses (ROA, ROE, and etc.). A table can be useful here.

In order to make this a relevant financial comparison, I have decided to compare the banner year in the case, 1991, with 2004 for the majority of my calculations. On a basic level, we can see that YUM has grown from 20,987 system units in 1991 to over 33,000 today, more than doubling its presence on the planet (only slightly thanks to the addition of Long Johns Silvers and A&W). During this time, worldwide profits have jumped from $575 million in 1991 to $4.36 billion in 2004; demonstrating an average per unit annual profit move from $27,398 to $132,121.

While these numbers are impressive, financial ratio analysis makes it more difficult to ascertain the true strength of YUM. The return on assets seems to have declined by a fraction, from 13.5% to 12.2%. However, this can probably be explained by a maturation process that requires more assets to reach increasingly distant locations. Also, the current quarterly revenue growth percentage for YUM (4.3%) lags far behind that of its main competitor, McDonald's (9.2%), and the industry as a whole (15.3%).

Nevertheless, YUM must be doing something right recently, since it's share price has risen steadily from 25.12 on 1/2/03 to 51.29 on 5/31/05, amid strong analyst outperform recommendations.

2. What kind of business is a fast food restaurant? Show your industry analysis.

Between the times that George H.W. Bush began his tenure as Vice-President in 1980 and ended his term as President in 1992, fast food restaurants underwent a complete revolution. Before 1980, the industry was comprised of a few regional chains whose primary concerns were dining area service and large kitchen space. This all changed in the 1980s, when new locations were built to emphasize speed, simplicity, convenience, value, and variety. Such a radical transformation begs an industry analysis.

In hindsight, the decade-long shift to the Fast Food Nation we live in today had nothing to do with the inherent strength of the quick service restaurants (QSR) industry. Rather, it had everything to do with the industry's ability to meet consumers' needs. Using Porter's Five Forces model as a guide, the industry is highly unattractive in four of the five force areas, with supplier power being the only real area of strength for QSR companies. On this level, QSRs purchase only the most basic of food items (lettuce, chicken, et cetera), and have a number of suppliers to choose from when making these decisions. Furthermore, as the case demonstrates, QSRs have added supplier resources, in the form of the co-ops and integrated distributors that have been formed over the years, which make the process even easier and more cost-effective.

Degree of rivalry, threat of entry, and threat of substitutes are all highly related (and highly dangerous) when speaking of the fast food industry. Beginning with the competition that already exists, it is fairly obvious when you drive anywhere in (and beyond) that the QSR market is saturated. And since the Yum Restaurants, Burger King's, McDonald's, and Wendy's of the world are all somewhat equally strong, it makes the competition that much more intense. Everyone mimics everyone else to some degree, menu items are copied, and margins are reduced.

Most likely, this comes as the result of the QSR industry lacking complexity. Essentially, anyone can do this with a minimal amount of startup capital and some very basic food distribution knowledge. Consequently, entry barriers are slim when it comes to fast food. While economies of scale do exist that allow the largest companies to operate on lower cost levels due to their buying power and cross country presence, individual concept QSRs and smaller chains can still thrive under the right business model.

Along the same lines, it has become increasingly hard to identify where a QSR stops and all other restaurants begin these days. More and more establishments open that blur the line between fast food and a family/casual dining experience. A great example of this phenomenon can be found in the case, namely California Pizza Kitchen. While not a direct competitor to the other PepsiCo restaurants at the time, it still pulled customers and their dollars away from the QSR industry.

Finally, we come to buyer power. Unfortunately for QSRs, their customers are extremely price sensitive AND can easily switch to a competitor at the drop of a hat. On the positive side, there are so many potential customers (since everyone has to eat) that the loss of one person can easily be made up by adding another. However, now that QSRs can be found on virtually every corner of every town on the planet, it is next to impossible to build the type of true brad loyalty that guarantees repeat business.

Yet despite all of the red flags that appear in the fast food industry, it continues to thrive thanks to the simple notion that, as a whole, it meets customer needs. As a result, QSR growth continues at a strong pace even though individual companies within the industry face difficult problems every day.

3. What are Yum's resources and capabilities? Are they general or specific? Are they sustainable as strategic weapons? Explain the sources of sustainability of each key resources and capabilities.

When analyzing Yum Brands restaurants, there are not a whole lot of specific resources that the company has at its disposal. Naturally, this is a result of the industry in which it deals, which is very fragmented in its own right. Nonetheless, the Yum restaurants have one powerful weapon that is sustainable for many years to come: national brand awareness.

As the pioneers and market leaders in the chicken, Mexican, and pizza segments of the QSR world, Yum Brands is able to trade on its name alone. Consumers are aware of their products (along with the A&W and Long John Silvers chains to a lesser extent) and trust that they will get a similar experience no matter where they are on the planet. Suppliers who want to land or keep the big account, have to give the Yum Brands what they want - at the price they want - or risk losing a major chunk of business. These two elements of brand image will allow the company to maintain its dominance for many years to come. In fact, the only way brands as strong as Taco Bell, KFC, or Pizza Hut could falter is through a health scare (like the finger found in the Wendy's shake), merger, extremely poor management, or an instantaneous massive shift in consumer tastes.

Looking at the more general resources Yum Brands has at its disposal, one must start with an extension of the brand image concept discussed above. To be clear, the