Web Exclusive | February 2011 | By Daniel P. Smith
What Went Wrong at Yum
Back in mid-2002, optimism reigned at Tricon Global Restaurants, the predecessor to Yum! Brands.
The Louisville, Kentucky–based company had just purchased nearly 1,000 A&W restaurants and 1,200 Long John Silver’s units for $320 million, convinced that the recognizable names and multibranding possibilities could raise average unit volumes as much as 30 percent and produce upward of $5 billion in incremental system sales alongside nearly $1 billion in additional shareholder value.
But the promise never came true.
On January 18, Yum announced it was selling both A&W and Long John Silver’s, saying in a release that the company was “sharpening its long-term growth focus on building leading brands in every significant category in China, driving aggressive international expansion, and improving its U.S. brand positions by building new dayparts and sales layers at Taco Bell, Pizza Hut, and KFC.”
Simply put, Yum chairman and CEO David Novak said Long John Silver’s and A&W did not fit into Yum’s long-term growth strategy.
Yum’s decision, which joined with the Wendy’s/Arby’s split as the second major sales announcement in recent weeks, cements Yum’s focus moving forward while leaving two brands—A&W and Long John Silver’s—in uncertain times.
An Imperfect Match
At the time of Yum’s purchase in 2002, A&W and Long John Silver’s were viewed as complementary names for the company’s multibranding strategy, two identifiable brands capable of accelerating Yum’s domestic growth alongside the bellwether Taco Bell, KFC, and Pizza Hut concepts. Analysts were mixed on the purchase, some believing Yum overpaid for tired brands, others seeing attractive long-term potential even amid short-term concerns.
“Yum felt they could rejuvenate both brands and do more with them under their control,” Edward Jones analyst Jack Russo says. “The restaurant environment then was in good shape … with strong optimism for cobranding opportunities.”
As time passed, however, A&W and Long John Silver’s seemed more hassle than help. Despite the fact that both fill uniques niches—A&W holding the nostalgic mantle as the nation’s oldest quick-service outlet and Long John Silver’s positioned as the clear quick-service seafood leader—Yum’s attention turned elsewhere.
Yum found its greatest success story lay overseas, precisely where A&W and Long John Silver’s weren’t. Today, about 65 percent of the company’s profits reside outside of the States.
“Yum’s about operating global brands, which A&W and Long John Silver’s aren’t and probably never will be,” Stifel Nicolaus restaurant analyst Steve West says.
Furthermore, the multibranding approach once championed by Yum leadership as a “breakthrough strategy” proved to be a domestic disappointment. Quickly, A&W and Long John Silver’s became dispensable.
“The multibranding concept just couldn’t get any traction,” Russo says. “With A&W and Long John Silver’s, Yum hoped they could do some positive things, but nothing really panned out.”
What the Future Holds
When purchased in 2002, Long John Silver’s and A&W’s 2,200 units collected annual revenues nearing $575 million, a mere sliver of Yum’s overall system. Today, that reality remains intact: at 1,630 units, the two brands remain an immaterial slice of Yum’s 37,000-unit enterprise.
“A&W and Long John Silver’s didn’t contribute much [to Yum] while there and their sale won’t mean much moving forward,” Russo says. “[The sale] doesn’t move the needle either way… though it does show analysts and investors that Yum is getting more focused. Wall Street likes that.”
West says Yum’s decision follows McDonald’s playbook of being better, not bigger.
“Yum purchased these two concepts to drive growth, and that really didn’t happen,” West says. “Few have proven an ability to run multiple brands … and this sale means Yum can focus on being the global brand it wants to be.”
Private-equity groups are the most likely buyers for the brands, which could be purchased together or split to the highest bidder. Even then, however, both concepts face an uphill charge. Amid the health care debate, Long John Silver’s heavily fried menu looks out of touch with today’s trends. With the surging momentum of hamburgers across the quick-service arena, A&W appears better positioned for success, though its menu and many of its stores remain dated.
“Ultimately, both of these brands will find another home, but there’s a turnaround that has to be made no matter who acquires them,” Morningstar senior analyst R.J. Hottovy says. “They’ll have to make their menus more relevant, the value proposition more compelling, and mix in some premium offerings.”
When asked for comment, one A&W franchise board member declined to offer specifics, saying only that A&W operators “remain in the dark.” The franchisee’s disenchantment seems a sour note to A&W’s 92-year history, if not a sensible move for global-focused Yum.
“Let’s face it,” Hottovy says, “hamburger brands are going to have difficulty outside of the U.S. while a seafood brand is tough to transfer over. In the end, this makes sense for Yum. They can focus on their core brands, international growth, and turning around domestic assets.”
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