How Yum! Brands, Inc. (NYSE:YUM) Will Deal With Underdeveloped Franchise Market In China?

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Yum! Brands, Inc. (NYSE:YUM) managed to end the last trading session in a positive note as it closed with minor gain of 0.29% but the lower closing price compared to the day open made the daily candle red in color, indicating weakness. The volume of the day at 4 million was much lower than the daily average of 8.2 million, reflecting the indifference of the investors at this point of time. The stock has crashed very sharply just a few sessions back, followed by a corrective bounce which has faced stiff resistance at the gap left behind. The gap must be crosses before the bounce can extend.

YUM

As Yum! Brands, Inc. (NYSE:YUM) plans to increase its store footprint in Chinese markets and revive staggering growth there, it faces a challenge with one of its conventional growth drivers, and that it the nation’s underdeveloped franchise market. The parent firm of Taco Bell, Pizza Hut and KFC said that it will spin off its China operations where it intends to increase its restaurant number to 20,000 and get in more franchise associates. Nine in ten Yum stores globally are franchised.

The problems

The real problem that Yum! Brands need to deal with is China’s franchise industry, which has suffered due to opaque food chains, lack of reliable associates and food safety worries, indicating companies often route to operating stores directly. This provides them more insight, but it potentially slows expansion and increases costs.

Franchising has always remained as an iffier proposition in Chinese market. There is a lack of large-scale associates, food safety fears and intellectual property risks. Only 7% of Yum! Brands’ 6,900 China outlets are operated as a franchise compared to massive 91% outside China. The peer firm McDonald’s Corporation (NYSE:MCD)‘s franchises are nearly 15% of its total stores in China compared to 80% globally.

The plans

Yum! Brands intend to increase its franchises to one in ten of its China stores this year. Decisions subsequently will be left up to the new spun-off firm in China. McDonald’s is following the same course,, and confirmed recently it was seeking a buyer for its Taiwan outlets.

Franchising has remained an important tool to boost expansion plans. In Yum! Brands’ FY2014 report, the CEO Greg Creed mentioned the firm possesses the franchise capability essential to support growth. While the franchising model has been deemed successful in developed markets, it has less popularity in China, a market where company is accelerating growth at break-neck speed.

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