Yum Pins Its Future on China

There is perhaps nothing more ubiquitous in America than McDonald's (NYSE: MCD). The fast food giant has restaurants it seems in virtually every town and city in the country.

One of McDonald's rivals, Yum Brands (NYSE: YUM), dreams one day of having a restaurant in every town across the country. Yum Brands owns a number of fast food brands including KFC, Pizza Hut and Taco Bell.

But the country Yum management is dreaming about is not the United States where the company continues to struggle. When talking about its performance here in the United States, management called 2011 “disappointing” and “terrible” thanks to the weak domestic economy.

No, the country Yum Brands has its sights set on is China, where it already has a large presence and leads it rival, McDonald's, 3 to 1 in market share.

Fast food in China is definitely a growth business. This industry has recorded double-digit annual growth every year since 2003. But it is still half the size of its U.S. counterpart. When one thinks in terms of the size of the Chinese population, one can only think of the potential for more growth.

Yum Brands has had great success in China where its KFC brand is the number one fast food restaurant chain and its Pizza Hut brand is the number one casual dining restaurant chain in the country. Yum is still growing rapidly in China, opening one new restaurant every day in the vast Asian nation. The continued rapid growth led to Yum earning about $900 million in net income from its Chinese business in 2011.

The company's goal is to set up its fast food restaurants in all of China's second and third-tier cities over the next decade. It plans to more than double its restaurants in China by 2020, when it expects to have 9,000 of them spread across the country.

To accomplish this, Yum plans to build small restaurants in Chinese rail stations and airports and to use its well-developed distribution network to expand into the second and third-tier cities in China. These restaurants in the smaller cities should be very profitable because both labor and rents in these areas are cheap and the company's brands are already well known.

The company's hunger for growth extends beyond China too. Yum has also its sights set on other emerging markets besides China. It is trying duplicate its success in China in India and other developing Asian markets.

As in China, Yum plans to do this by offering innovative dishes catered to local tastes. In addition, the company plans to have extended hours and offer tasty breakfast choices to its consumers in these markets.

This is all part of the management's grand plan to pare back ownership of restaurants in developed markets while accelerating its push into emerging markets around the globe.

Currently, the breakdown of restaurants owned is 53% in emerging markets and 47% in developed markets. But Yum wants to tilt that heavily in favor of emerging markets.

The company says by 2014 it expects that 70% of the restaurants it owns will be in emerging markets with just 30% in developed markets.

Emerging markets now make up 58% of its operating profits. The management at Yum would like to raise that up around 75% over the next few years and they likely will.

This makes Yum Brands a good choice for investors looking to gain exposure to the growth of the developing market consumer. And without having to buy a foreign stock.

This article was originally written for the Motley Fool Blog network. All of daily articles for the Motley Fool can be found at http://blogs.fool.com/tdalmoe/