Yum! Empire: The 10-Year Rise And Fall Of KFC, Pizza Hut In China

KFC and Pizza Hut once ruled China, but the iconic American brands have now lost their edge in the world’s second largest economy.

On Tuesday, Yum! Brands announced the spin-off of its Chinese unit as a separate publicly traded company amid failed attempts to reboot its China sales. The long-anticipated news came not long after activist investor Keith Meister, who has urged for the breakup, joined its board of directors. Investors cheered the decision by sending the shares up 1.8% yesterday. “We view [the] announcement as a larger positive, as it will get YUM! Brands off of the China roller coaster in a meaningful way,” Nomura analysts Mark Kalinowski and Ryan Kidd wrote in a research note.

While Yum! Brands, which owns KFC, Pizza Hut and Taco Bell, is struggling to regain the interests of Chinese consumers, the company has enjoyed more than a decade of spectacular growth in the country. Since opening its first store in China in 1987, the company has grown into some of the most successful foreign brands in China thanks to aggressive localization, ranging from offering Peking duck burritos at KFC to creating a clean, upscale dining environment at Pizza Hut. The fast-food chains even became common gathering spots for the Chinese, rather than simple take-out places in the U.S.

As a result, Yum! Brands’ popularity in China became the key driver of the company’s growth for years. Between 2006 and 2012, the chains averaged double-digit annual growth in China, reaching the peak at 46% in 2008, while annual growth in the U.S. remained in the negative range during the same period of time. The sales growth in China in turn boosted the percentage of revenue from that part of the world to 52% last year, compared to 14% in 2005. In contrast, the share of revenue from the U.S. was 63% ten years ago. That number has now dropped to 22%, as the Yum! brands continue to struggle with changing consumer tastes to healthier food.

But since 2012, major food safety scandals and intense local competition have ended  Yum Brands  golden age. Annual sales growth remained nearly flat for the past two years, as the chains failed to regain the confidence of Chinese consumers especially after damning reports about the use of expired meat. Meanwhile, sales in America actually recovered somewhat--there's little growth there, but at least KFC, Pizza Hut, and Taco Bell don't appear to be losing fast food share any more at home.

Whether China's Yum! spinoff can recover is an open question, and one that weighs on this spin off. If it continues to flail, the move could free up the American brands from its lagging sister. On the other hand, if China rebounds faster than expected, the parent company may wish it could still rely on what has been its main source of growth the past decade.