Yum! Brands Major Initiative. Professor Leslie Ann Dunn, MBA, JD. November 11, 2011

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1 Running Head: YUM! BRANDS MAJOR INITIATIVE 1 Yum! Brands Major Initiative Melinda Kelley Legal 100 Professor Leslie Ann Dunn, MBA, JD Strayer University November 11, 2011

2 YUM! BRANDS MAJOR INITIATIVE 2 Yum! Brands Major Initiative Louisville, Kentucky based fast food chain Yum! Brands, Inc. claims to be the world largest restaurant organization with nearly 38,000 restaurants in over 110 countries and territories and more than 1 million associates (Yum! Brands, 2011) Yum! has three divisions, U.S., International, and China. Outside the United States in 2010, the Yum! system opened approximately four new restaurants each day of the year, making it a leader in international retail development. (Yum! Brands, 2011) Some of the well-known brands that fall under the Yum! corporate structure are: KFC, A&W, Long John Silver s, Taco Bell, and Pizza Hut, to name a few. KFC was the first quickservice restaurant chain to enter China in 1987, the first to bring franchising to China in 1992, and the first to open a drive-through in China in (Yum! Brands China, 2011) Yum! has set its sights on building their global presence and have four key strategies to assist them in obtaining their goal. Their major initiative and concentrated focus and efforts are directed mostly on building their brand in China. While three of the four key strategies are major stepping-stones in the initiative, the first of their four strategies is build leading brands across China in every significant category. (Yum! Brands, 2011) Yum! s all-encompassing vision is their consistent commitment to deliver at least 10% EPS (earnings per share) growth annually. (Yum! Brands Vision & Strategy, 2011) The China division of Yum! is based in Shanghai and because of the China divisions past performance in growth and unit sheer size, in 2005 Yum! started reporting the division separately from its other combined international reporting s. According to a Bloomberg report, in early 2011 Yum announced its plans to sell their stake in Long John Silver s and A&W restaurants. Yum! s CEO, David Novak stated We do not

3 YUM! BRANDS MAJOR INITIATIVE 3 believe Long John Silver s and A&W-All American Food restaurants fit into our long-term growth strategy. (Patton, 2011) Going forward, Yum! Brands wants to focus on its international division with more concentrated efforts directed on the China division, as well as their YRI (Yum Restaurant International) division as they continue to show strength in growth. In 2009, Yum! s China division had third-quarter postings that were up by 12% to $1.19 billion dollars with shares increasing 2.4% to $ for the same period. (Patton, 2011) In October 2011, Barrons posted Yum! Brands Inc. (NYSE: YUM) today reported results for the third quarter ended September 3, 2011 including EPS of $0.83, excluding Special Items. After a Special Items loss of $0.03, reported EPS was $0.80. As a result of strong performance in China and other emerging markets, Yum! reconfirms full year EPS growth forecast of at least 12%, excluding special items. (Jerzyk, 2011) According to Mark Brandau, for the first half of 2011, 48.4% of Yum! s total $820 million of operating profit comes from China. (Brandau, 2011) In a July 2011 conference call, Yum! s CFO, Richard Carucci stated Not long ago, we projected 75% of our operating profit would come from China and YRI (Yum Restaurant International) by As of the second quarter of this year, we're nearly there already. (SeekingAlpha, 2011) In his closing remarks on the call, Carucci stated The Yum! growth equation is not only strong, but is gaining strength. With our combined strength in emerging markets, we believe we are well positioned for growth for many years to come. (SeekingAlpha, 2011) Although Yum! has not publically released their specific revenue targets in the China and YRI markets for the next five years; they have demonstrated continual growth in their YRI and China divisions and by all indications, Yum! s leaders appear to be pleased with the growth

4 YUM! BRANDS MAJOR INITIATIVE 4 progress and obtaining their major initiatives for these areas. Yum! has made it a goal to have at least 20,000 units over the long term in mainland China. (Yum! Brands China, 2011) The 20,000 units are defined as individual restaurant locations. Administration Law & Impact According to various source authors for the New York Times, YUM! Brands, Inc. units are operated by a Concept or by independent franchisees or licensees under the terms of franchise or license agreements. In addition, the Company owns non-controlling interests in entities in China who operate similar to franchisees of KFC and a non-controlling interest in Little Sheep, a Hot Pot concept. Through its Concepts, YUM develops, operates, franchises, and licenses a worldwide system of both traditional and non-traditional QSR restaurants. (Independent Authors, 2011) Yum! Brands would be subject to proper reporting to the U.S. Internal Revenue Service, for revenues derived from foreign companies in which they are vested. In addition, Yum! Brands could be a liable party for any disputes arising from foreign employees that work with their organization through China and YRI divisions. By operating outside of the United States, Yum! Brands could also be subject to privity of contract, meaning any unvested third party may have the right to enforce a contract between Yum! Brands and their business partners, joint-venture partners, or franchisees, therefore it would be in Yum! s continued best interest to ensure all documentation meets standards set forth by the Chinese government and regulating agencies. Should the Louisville Company find they are in need of government intervention for any labor disagreements, brand name infractions, or contract disputes, they would be subject to China s Civil Codes and Civil Statues; since China does not recognize US Common Law

5 YUM! BRANDS MAJOR INITIATIVE 5 authority for these types of disputes, and they would need to ensure they have qualified professional attorneys in place who are familiar with Chinese law to help Yum! resolve any potential conflicts. (Bagley & Savage, Chpt. 7 ~ Contracts, 2009) In addition to the management and administration side of setting up and managing a business, from a paperwork point of view; there are also China Administration Laws regarding food hygiene and protocols in place that dictate the preparation, dispensing, and serving the food that restaurants must strictly follow. Listed on the China Laws & Regulation website, Chapter V, Article 14 of the Chinese regulations, government departments are identified as to how and what they regulate in the food industry. Chapter V, Article 15, addresses which hierarchy will be responsible for any hygiene standard is not currently in place for certain food items, when it has been determined that it is now necessary to regulate that type of food and/or its preparation and handling. (Food Hygiene Law of the People's Republic of China, 2011) Applicable Licensing Since Yum! Brands is a U.S. based company, and one that is regarded as a Quick Service Restaurant (QSR), they would be required to have a business license within the states, counties, or municipalities in which they operate in the United States and any necessary papers in order to operate in foreign countries. (Bagley & Savage, Chpt. 6 ~ Administrative Law, 2009) According to the International Finance Corporation website, in order for a company to open a new business in China; there are fourteen steps an organization must take in order to be approved for entry into the county; and the approval and licensing process takes approximately 40-days from start to finish. The first three steps of the process are: 1) apply for approval of their company name; and 2) open a preliminary bank account and deposit startup funds equal to

6 YUM! BRANDS MAJOR INITIATIVE 6 30,000 CNY (China Yuan Renminbi), and 3) obtain capital verification from an auditing firm. (Starting a Business in China, 2011) Recommendations Considering that Yum! Brands is quite established in China with mirrored restaurants that are popular here in the United States, my only recommendation to the company would be to continually stay abreast of the laws, regulations and jurisdictions that regulate their industry. (Bagley & Savage, Chpt. 8 ~ Sales, Licensing, and E-Commerce, 2009) At the current time, China appears to be welcoming to foreign investment organizations; however the China government could change their laws to those that would perhaps limit the size or unit number of businesses an American company can have an interest in China. Should this scenario become reality, Yum! Brands could find themselves face with a need for a quick market exit and needing to find buyers for their vested share in the companies located throughout China. Should these events indeed take place, Yum! Brands would find themselves at China s and a buyers mercy and could possibly in the end, be forced to sell off units at a major loss. A loss that could mean the demise of the company worldwide, as almost half of their annual revenues are currently generated from the China market.

7 YUM! BRANDS MAJOR INITIATIVE 7 Resources Food Hygiene Law of the People's Republic of China. (2011). Retrieved November 24, 2011, from China Laws & Regulations of Food, Drugs and Cosmetics: Starting a Business in China. (2011). Retrieved November 24, 2011, from The World Bank - International Finance Corporation: Bagley, C. E., & Savage, D. (2009). Chpt. 6 ~ Administrative Law. In C. E. Bagley, & D. Savage, Managers and the Legal Environment (pp ). Mason: Cengage. Bagley, C. E., & Savage, D. (2009). Chpt. 7 ~ Contracts. In C. E. Bagley, & D. Savage, Managers and the Legal Environment (pp ). Mason: Cengage. Bagley, C. E., & Savage, D. (2009). Chpt. 8 ~ Sales, Licensing, and E-Commerce. In C. E. Bagley, & D. Savage, Managers and the Legal Environment (2010 ed., pp ). Mason, OH: Cengage. BBC News. (2011, July 14). Strong KFC Sales in China Lift Profits at Yum Foods. Retrieved November 12, 2011, from BBC News Business: Brandau, M. (2011, September 9). China: A look at strategies from McDonald's, Yum! Brands. Retrieved November 12, 2011, from National Restaurant News: ChinaToday.com. (2011). China Law and Justice. Retrieved November 24, 2011, from China Today:

8 YUM! BRANDS MAJOR INITIATIVE 8 Independent Authors. (2011, November 24). YUM! BRANDS INC. Retrieved November 24, 2011, from New York Times: Jerzyk, T. (2011, October 4). Yum! Brands Inc. Announces Third Quarter 2011 EPS Growth. Retrieved November 24, 2011, from Barrons: html La Monica, P. R. (2011, January 19). Colonel Sanders: China's Favorite Import. Retrieved November 12, 2011, from CNN Money: Patton, L. (2011, September 22). Yum Sells A&W, Long John Silver s Chains to Focus on Expansion in China. Retrieved November 12, 2011, from Bloomberg: SeekingAlpha. (2011, July 14). Yum! Brands' CEO Discusses Q Results - Earnings Call Transcript. Retrieved November 24, 2011, from SeekingAlpha Call Transcripts: Yum! Brands. (2011). Our Brands. Retrieved November 12, 2011, from Yum! Brands: Yum! Brands China. (2011). China. Retrieved November 12, 2011, from Yum! Brands: Yum! Brands News. (2011, November 7). News. Retrieved November 12, 2011, from Yum! Brands:

9 YUM! BRANDS MAJOR INITIATIVE 9 Yum! Brands Vision & Strategy. (2011). Vision & Strategy. Retrieved November 12, 2011, from Yum! Brands:

NEWS. Tim Jerzyk Senior Vice President, Investor Relations

NEWS. Tim Jerzyk Senior Vice President, Investor Relations NEWS Tim Jerzyk Senior Vice President, Investor Relations Yum! Brands Reports First-Quarter EPS Growth of 21%, or $0.76 Per Share, Excluding Special Items; Strong Sales and Operating Profit Growth Across