Resolved clauseRESOLVED: Shareholder requests that the Board of Directors prepare a strategic review regarding a proposed spin-off of YUM’s KFC, Pizza Hut, and
Taco Bell franchises into three separate publicly traded companies, and dispose of its Habit Burger chain in a separate, pre-spinoff transaction.
Supporting statementSUPPORTING STATEMENT: Spinning off YUM’s three main franchises into separate companies would allow distinct CEO’s, managements, and boards
to focus better on each chain’s operations, including each franchise’s unique brand and end-markets. Separate companies would also allow talented
operating heads to remain at each company as CEO, instead of having to depart eventually. For example, Brian Niccol, the highly talented former
president of Taco Bell, left the chain in 2018 to become CEO of Chipotle. If Taco Bell had operated as a separate company, it would have been highly
likely that Mr. Niccol would have continued managing the franchise.
Moreover, it seems apparent that YUM is experiencing serious challenges in concurrently operating three global franchises at optimal levels. For instance,
all three flagship YUM franchises continue to lag meaningfully behind its main competitors in sales performance: From 2016 through 2022, Chick-fil-A’s
system revenues expanded at a six-year compound annual growth rate (CAGR) of 15%, versus 5.3% for KFC; Domino’s Pizza’s system revenues grew at
a six-year CAGR of 8.4%, versus 1.2% for Pizza Hut; and Chipotle, Inc’s system revenues rose at a six-year CAGR of 14%, versus 7.3% for Taco Bell.
On a per-outlet sales basis, YUM, again, lags behind its primary competitors: For example, in 2022, Chipotle posted per-outlet revenues of $2,698,000,
more than 50% higher than those of Taco Bell, which posted per-outlet revenues of $1,783,000. Chick-fil-A’s outperformance was even more stark: In
2022, Chick-fil-A posted per-outlet revenues of $6,714,000, almost 500% greater than those of KFC, which generated per-outlet revenues of $1,121,000.
It seems that YUM’s competitors are also grabbing significant market share away from YUM’s franchises. For example, from 2016 through 2022, U.S.
chicken franchise restaurant industry revenues grew at a six-year CAGR of 11%. During the same period, Chic-fil-A’s and KFC’s U.S. revenues grew at
six-year CAGRs of 15% and 2.2%, respectively. As such, it seems to reason that Chic-fil-A is taking serious U.S. market share away from KFC.
Turning to the Habit Burger (HB) franchise, since YUM’s $408 million acquisition of HB in early 2020, YUM has written off more than 70% of acquisition
goodwill and 35% of YUM’s initial investment in the chain. Given HB’s ongoing lackluster financial performance, the shareholder believes the chain will
generate long-term investment results from between low single-digit returns on invested capital (ROIC), to outright permanent capital losses.
Unfortunately, YUM’s middling operating results have cascaded over to its investment performance: From 2012 and 2017—through 2022, YUM shares
grew at 10- and five-year CAGR’s of 11% and 10%, respectively, approximately matching the S&P 500 Index. For 2023, YUM is on track to underperform
the Index by 20%. These results are particularly disappointing, given that YUM generates “look-through” ROIC of almost 50%.
Filed by the Robert Elliot Friedman Trust