Web Exclusive | February 2011 | By Daniel P. Smith

What Went Wrong at Yum

A&W, Long John Silver’s lack of international strength didn’t align with company goals.

&W, Long John Silver's didn't fit with the Yum! Brands plan.
image used with permission.

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.

“Yum’s about operating global brands, which A&W and Long John Silver’s aren’t and probably never will be.”

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.”

Comments

YUM cannot do rejuvenation not can it do turnaround...

YUM! is out of balance with their dependence on the China market to produce sales and profit.

They are doing good numbers in Nigeria and have opened 9 restauarants in just under a year.Africa ( especially sub sahara) / China are potentially big chicken markets for KFC .Focus is all they are trying to achive.

Meh, who cares- they carry Pepsi products anyway.

Never late to make the right decision. I believe, the focus on the core business will bring better leverage for the growth drivers of YUM in International markets.

Yum did not have a clue as to what they were buying. They thought they could run AW & LJS just like their brands. They should have listened instead of terminating a significant number of "specialist" mid level managers. LJS & AW would have done much better without Yum.

I thought you had already sold this operation, because obviously it has been significantly downgraded in recent months. Poor quality, poor service. Are you trying to kill it rather than sell it?Seems extraordinarily injudicious.

David Novak thought that he was the king of multibrands. There was never any funds left for marketing for the two brands. He overpaid for the two brands he had no idea about but instead of pulling the plug early on he decided he was going to leverage it to the franchisees and blame them for running it in the ground. I will say the worst decision you ever made was putting Andy Rosen in charge of the brands. Who wants to buy two concepts with no assets. Who is to say the franchisees don't pull the plug after the companies are sold. Anyways great long term planning for these two brands for you have taken A&W and Long John Silvers to an all time low. Really low.

Long John Silvers apparently felt the same way about their own company having sold most restaurants to franchisees.

I am coming to the table late, so perhaps my perspective is off base in light of how successful Yum brands has become. I agree with most comments. A company should not stick their neck out if they know nothing of the brands they are buying. I do not feel the two lost companies were overpriced. I was never a big consumer of LJS or A&W, but I liked both brands and occassionallly dined at them for a change. I agree that more choices other than pepsi products should be offered. Yum brands did little to make the two members into a global brand. They should have focused on updating the outdated A&W franchises and I think it could have went along way to increasing sales. After they brought it up to par then try to go international. The above comment about all the fried food at LJS was very smart in a health conscience growing population. It would have been easy to offer more low cost options and add some other ways to cook food beside frying. That alone would have went far to increase sales. Personally, I think it was a mistake to sell them. They could have turned it around. They had the money, they just needed to put more time into them. They were older brands and outdated in style, but many brands have been revived to be overly successful with just a little ingenuity. A fun, highly musical song jingle stuck in your head would really do wonders on the advertising end. Csustomer Service is a priority no matter your restaurant. Happy employees make for the start of your success and it all begins with a good work environment. I wanted to see Yum brands continue adding more brands. Who cares if their global. Plenty of new brands starting in US each year. They need to send out scouts and take surveys. You do not have to be global to be successful. Global is just an extension of your sales to continue growing the brands and make you stronger overall. It should not be your main goal. Plenty of great brands that are global if Yum brands are still looking. However, I think it would be better to get one cheaper and take it global than to try to buy a global brand and improve on it. There is more room for growth and exciting new products in a smaller brand. Rebranding a tired brand can be difficult, but if done right it works well. Pringles potato chips is just one of many examples.

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