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Real Estate On the Menu at KFC, Taco Bell and Pizza Hut

Yum! Brands Selling Hundreds of Company-Owned Restaurants
February 15, 2012
Yum! Brands, the world's largest restaurant company with more than 38,000 eateries in more than 110 countries, is turning more and more of its attention to China. To help fund its expansion overseas, the firm is in the process of selling off a big chunk of its U.S. restaurant real estate.

The Louisville, KY-based company's restaurant ownership in the U.S. dropped to 13% from 15% last year. Yum! Brands closed or sold/refranchised 404 restaurants, including 264 KFCs (Kentucky Fried Chicken), 74 Taco Bells and 66 Pizza Huts.

During the fourth quarter, it also divested its Long John Silver's and A&W All-American Restaurants brands. These divestitures included 1,232 franchise units in the U.S.

Going forward, Yum! Brands said its targeted ownership rate for Pizza Hut and KFC restaurants is about 5%. That puts about 225 KFC units and 175 Pizza Huts on the table for sale/refranchising or closure.

It also plans to reduce its company ownership in Taco Bell from 23% to about 16% throughout the next two years. That means Yum! Brands could dispose of some 365 Taco Bell restaurants.

Yum! Brand results in the U.S. were disappointing in 2011 with full year profits down 12%.

"We had a solid year at Pizza Hut, but weak sales and profit results at Taco Bell and KFC," Richard T. Carucci, CFO, reported during the company's quarterly earnings conference call.

The firm clearly sees international growth as the key to its future.

"We expect to again add 1,500 new units outside the U.S. in 2012, at least 600 new units in China, about 800 new units in Yum! Restaurants International and 100 new units in Yum! Restaurants India," Carucci said. "Our philosophy is really pretty simple. We reduce company ownership in highly penetrated or underperforming markets and we increase exposure in emerging and under-penetrated markets."

"We continue to reduce our footprint in highly penetrated markets [e.g. the U.S.]," Carucci said. "In December of 2011, we completed the sale of Long John Silver's and A&W All-American Restaurants. The larger of these concepts, Long John Silver's, has about 97% of their restaurants in the U.S. Second, we continue our U.S. refranchising program. Our plan is to retain about 5% ownership in KFC and Pizza Hut. We are currently at 8% ownership with Pizza Hut and plan to be at 5% ownership for KFC by the end of 2012. We announced at our investor conference our plan to reduce Taco Bell U.S. ownership from 23% to about 16% over the next two years."

That doesn't mean unit growth will stop in the U.S. but more of it will come primarily through franchising rather than direct ownership. That is particularly good news for Taco Bell and Pizza Hut fans.

"We think Taco Bell is a huge opportunity for Yum! Brands," Carucci said. "We're underpenetrated. We think if we can get a couple hundred thousand dollars more of sales volume. We can go from a little over 5,000 restaurants to 8,000 restaurants in the United States because we are the national competitor. So we really have a very dominant position."

Regarding Pizza Hut, David C. Novak, chairman, CEO and president of Yum! Brands, added, "We are working very hard on the operating side. We think there's significant opportunity to improve sales just through getting our pizzas to our customers faster, drive more productivity inside the store in terms of speed. So we think we have a lot of initiatives that will give us confidence that Pizza Hut's going to keep moving forward. I think the big chains are doing better now overall, because we've all improved our value proposition. And certainly, we've led the way with that at Pizza Hut."

Last year, the company acquired 50 new Pizza Huts and one Taco Bell, but no KFCs. It built 48 new Pizza Huts, 37 new Taco Bells and three new KFCs.

So with Yum! Brands looking to possibly get out of ownership of about 765 fast-food restaurants, that prompted us here at CoStar to look at what fast food restaurants have been selling for lately.

We analyzed 1,872 single-tenant, fast-food property sales in the last two years. The combined sales totaled $1.49 billion and the average fast-food eatery sold for about $793,500 per restaurant and $289/square foot.

While the average per square foot price dropped from $293 in 2010 to $285 last year, the volume of sales jumped 28% to $834.5 million.

Based on the analysis, Taco Bell was the ninth highest selling brand by average price/restaurant at $900,682 out of the Top 20 selling brands. KFC came in 12th at $788,751 and Pizza Hut at the 18th spot at $540,093.

At those average prices and if Yum! Brands sold the 765 it said it is targeting, the company could generate more than $600 million in real estate property sales.

The three top selling restaurant brands by average restaurant sales price were: Carl's Jr. at $1.86 million; and Del Taco and Jack in the Box at $1.43 million each.




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