Could Yum Brands soon become a party of five?
The global restaurant company’s CFO Chris Turner recently alluded to the possibility. During JP Morgan’s U.S. All Stars Conference last month, Turner talked at length about the advantages scale brings to his company, particularly during the past few challenging years. Those advantages include fewer input costs, supply chain efficiencies and favorable third-party contracts.
It appears the entire industry has caught on to these benefits. Since 2020, several multi-brand restaurant companies have grown even bigger. Inspire Brands acquired Dunkin’, for instance, while Restaurant Brands International added Firehouse Subs. Companies from Denny’s and Fat Brands to Woworks and Dave & Buster’s have added concepts to their rosters in the past few years.
Indeed, last year’s M&A market was busy in the restaurant space. This year has been slow by comparison, as inflation lingers and a possible recession cools the markets, but that’s not stopping Turner and his team from window shopping.
“I think you can imagine us being interested in a smaller brand like Habit and looking at how we can unlock growth. There are a lot of interesting categories out there we’re studying,” he said.
With KFC, Taco Bell, Pizza Hut and The Habit Burger Grill, Yum Brands is prominently positioned in four cuisine categories. The burger category is a new one for the company, which acquired The Habit Burger Grill in March 2020 just as the world was shutting down.
It was no doubt a challenging time to add a concept that generated most of its business from dine-in guests, but The Habit has proven to add value to the parent company. During Yum’s most recent quarter, the chain grew system sales by 10% driven by 15% unit growth, for instance. It also seems to be creating some confidence behind the idea of adding even more brands.
“Can we bring more brands into the portfolio? I think the answer’s yes. But we’re only going to do that if there is a growth case and that is what we saw with The Habit. We saw a great brand that needed scale and help in franchising,” Turner said. “Now that things have settled down, we’ll be refocused on accelerating growth in that brand, and we’ve learned a lot about how to integrate. We’ve improved our integration playbook because we haven’t done one of these in a long time. So, we’re keeping our eyes open.”
Of note, Yum’s last brand acquisition was the now-extinct Pasta Bravo in 2003. The company has plenty of reason to “keep its eyes open” now, despite a tumultuous market and murky interest rate environment.
“We think our five-times leverage makes sense,” Turner said. “We have no big debt requirements due over the next few years. We have an over 90% fixed rate in terms of debt financing. We feel good about our position right now.”
So, perhaps the question is what would make a good fit within this massive system that has significant brand equity? According to Turner, it would be something in a high-growth category that is not directly competitive with Yum’s existing brands.
“We’re always looking at different spaces. The Mediterranean food space is interesting. There’s lots of interesting categories out there we’re studying,” he said.
The Mediterranean category fits that “high-growth” definition, with players like Cava, The Simple Greek, Garbanzo Mediterranean Fresh, Taziki’s Mediterranean Café, The Halal Guys, Pita Pit and more. But there is also a void in Yum’s portfolio for Asian cuisine, sandwiches, bakery/cafes, coffee and barbecue.
Notably, this acquisition conversation extends beyond restaurant brands, and Yum is no stranger to adding tech companies to its fold as well. In 2021, for example, the company added tech companies Dragontail Systems and Tictuk, both of which are adding plenty of momentum on the digital side.
In fact, Yum is now a $20 billion digital business, with such sales exceeding 40%. Turner said the company “should be 100% someday.” He adds that Yum is striving to own more of its technology and, again, it all comes back to the benefits of scale.
“Technology is an area where you’ve got largely fixed-cost investments. There should be an economic advantage for us and our franchisees for deploying those investments on that scale,” Turner said. “We’ve been both building and acquiring our capability sets. That gets to one other differentiator in our strategy. We’re going to own more of our technology than many of our competitors, partly because of our scale and partly because it just makes sense. We can move faster when we own it. We also don’t want to be beholden to third parties for critical competitive advantages when we’re in pricing negotiations frequently.”
There is plenty of incentive for Yum to press the gas on digital. Turner said it has created labor efficiencies – removing tactical-level work in ordering, payment and kitchen rework, for example – and digital customers also spend more per check on average and visit more frequently.
What’s next on Yum’s tech wish list is anyone’s guess, though the conversation around automation and robotics is growing louder across the industry, Turner said.
“There’s a lot more to come in this space,” he said.