Yum! Brands: a compelling
growth story
The Sanlam Global High Quality Fund has been an investor in Yum! Brands – the world’s biggest restaurant company – since the fund’s inception in February 2014. The share has long delivered strong returns for our clients, and we continue to hold it with conviction. Backed by a durable economic moat and compelling growth prospects, we believe Yum! remains well positioned to generate attractive long-term returns.
With over 61 000 restaurants across more than 155 countries and territories, Yum! Brands is a truly global business. Its iconic brands – KFC, Taco Bell and Pizza Hut – are each category leaders in chicken, Mexican-inspired cuisine and pizza respectively.
Last year we discussed our investment in Yum! Brands’ Chinese franchisee, Yum China. It is important to understand the difference between the two businesses – whereas Yum China gets on with the actual work of running the restaurants, Yum! Brands takes a percentage of all revenues generated by its franchisees and operators globally.
Since we first added Yum! Brands to the Sanlam Global High Quality Fund, the share has outpaced the global market by over 100% in US dollar terms through to the end of March 2025. In our view, Yum! is a business of excellent quality. But what exactly defines quality in our eyes? Below we unpack our thinking and show how the company exemplifies the attributes we look for in our quality framework.
Our framework incorporates three elements:
The starting point in identifying the quality of a business is to look at its historical performance. One of our favoured metrics is return on invested capital (ROIC) – a simple way to measure how well a company uses the money it has to make more money.
For example, if I gave my daughter US$100 to start a lemonade stand, and she earns US$20 in profit after all her expenses, her ROIC would be 20%. It is calculated by taking a company’s profits and dividing it by the total money invested in the business, and it indicates how efficiently resources are turned into earnings.
The ROIC of Yum! Brands over the past decade has averaged 43%. We estimate that its cost of capital – the price a company pays to use money to run its business – is around 8%. If your costs are 8% but your returns are 43%, you end up with a fantastically good result.
The next part of the framework is growth. If a business has done well in a niche product or geography, the future isn’t going to look as rosy, since the growth opportunities are more limited. This is not the case with Yum! Brands, however – we remain confident in the growth prospects of this business.
According to Euromonitor, the food service industry globally is worth US$2.6 trillion. In 2024, Yum! Brands had systemwide sales of around US$65 billion (the total sales across all restaurants in the company’s global network), including both company-owned and franchised locations. This means that its market share globally is just 2.5%, leaving significant runway for market share gains into the future.
Why do we think Yum! Brands can gain market share? First, it has a well-invested store footprint. Almost 25% of its store base has been built or refitted in the past three years. For KFC, 50% of stores have been opened or refitted in the last five years. We expect the modern look of the store footprint to appeal to customers and to drive superior growth – which is especially relevant in emerging markets where Yum! has a prominent presence.
Yum! Brands also has significant digital advantages over competitors. Over the past few years, the company has either acquired or developed Dragontail (food optimisation), Tictuk (an ordering and marketing platform), Poseidon (point-of-sale technology), drive-through voice AI and an AI-driven inventory management system, alongside kiosks, loyalty programmes and individual brand apps.
The company will gain market share primarily by increasing its number of restaurants. Yum! has a long-term unit growth target of 5% per year, which we see as being highly achievable. There are plenty of new markets it can enter, and some long-standing markets have massive potential in terms of store numbers versus population (for example, China, India and Indonesia). Emerging markets are of particular importance, as these economies have the potential to mature, increasing disposable income and, with this, restaurant spend.
Another opportunity for Yum! is to repeat the success of Taco Bell in the US around the world. Taco Bell has been the high-flyer in the US restaurant industry for the past decade. If the company could repeat this success internationally, the unit count of this brand would balloon. Unit growth is supported by its partnerships with well-capitalised franchisees (for example, Yum China is net cash). This allows for unit growth even in otherwise more challenging macro environments. In fact, when times are tough, that is when Yum! usually takes most share as competitors fall away.
The last leg of the framework is the ‘economic moat’ – a term coined by Warren Buffett to describe the ability of a business to fend off the competition. The larger the ‘moat’, the better a business is able to earn supernormal profits for longer. We believe that the moat of Yum! Brands is a strong one based on brand recognition and its global scale.
KFC’s fried chicken recipe dates back over 75 years – the company has fended off countless copycats over the decades. Taco Bell has a cult following and, in the US at least, is synonymous with menu innovation, clever advertising and good value. Pizza Hut has struggled more over the past few years but has a long history in multiple markets and is especially well known for pizza delivery. These brands carry deep customer loyalty and cultural resonance, making it tough for new entrants to erode their market share without massive investments in marketing and time.
The global scale of the business amplifies its moat. The multi-brand approach also works in Yum’s favour in that brands can share best practices with each other. The size of Yum! allows it to negotiate better supply chain deals, invest in innovation and spread fixed costs like advertising and technology development across a massive base. These are advantages that smaller players can’t replicate.
Yum! Brands exemplifies our quality-first investment philosophy. Even though it has been a long-term winner for our clients, we remain happy holders of the share. The growth opportunity still on offer, combined with a durable economic moat, leaves us confident that the company’s returns will continue to reward into the future.
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