Pizza Hut 2015 Annual Report Download - page 112

YUM! BRANDS, INC.-2015 Form10-K4
Form 10-K
PART I
ITEM 1Business
of products. The Company, along with multiple independently owned and
operated distributors, utilizes approximately 20 logistic centers to distribute
restaurant products to our Company and franchise stores. We also own
a seasoning facility and a non-controlling interest in a meat processing
facility in Inner Mongolia, both of which supply products to our Little Sheep
business, as well as third-party customers.
Other Divisions In the U.S., the Company, along with the representatives
of the Company’s KFC, Pizza Hut and Taco Bell franchisee groups, are
members of Restaurant Supply Chain Solutions, LLC (“RSCS”), which is
responsible for purchasing certain restaurant products and equipment. The
core mission of RSCS is to provide the lowest possible sustainable store-
delivered prices for restaurant products and equipment. This arrangement
combines the purchasing power of the Company-owned and franchisee
restaurants which the Company believes leverages the system’s scale
to drive cost savings and effectiveness in the purchasing function. The
Company also believes that RSCS fosters closer alignment of interests
and a stronger relationship with its franchisee community.
Most food products, paper and packaging supplies, and equipment used
in restaurant operations are distributed to individual restaurant units by
third-party distribution companies. In the U.S., McLane Company, Inc.
(“McLane”) is the exclusive distributor for the majority of items used in
Company-owned restaurants and for a substantial number of franchisee
and licensee stores. The Company entered into an agreement with McLane
effective January 1, 2011 relating to distribution to Company-owned
restaurants. This agreement extends through December 31, 2016 and
generally restricts Company-owned restaurants from using alternative
distributors for most products.
Outside the U.S., we and our franchisees use decentralized sourcing and
distribution systems involving many different global, regional and local
suppliers and distributors. We have approximately 5,700 food and paper
suppliers, including U.S.-based suppliers that export to many countries.
Trademarks and Patents
The Company and its Concepts own numerous registered trademarks and
service marks. The Company believes that many of these marks, including its
Kentucky Fried Chicken®, KFC®, Pizza Hut® and Taco Bell® marks, have
significant value and are materially important to its business. The Company’s
policy is to pursue registration of its important marks whenever feasible and
to oppose vigorously any infringement of its marks.
The use of these marks by franchisees and licensees has been authorized
in our franchise and license agreements. Under current law and with proper
use, the Company’s rights in its marks can generally last indefinitely. The
Company also has certain patents on restaurant equipment which, while
valuable, are not material to its business.
Working Capital
Information about the Company’s working capital is included in MD&A in
PartII, Item 7 and the Consolidated Statements of Cash Flows in PartII,
Item 8.
Seasonal Operations
The Company does not consider its operations to be seasonal to any
material degree.
Competition
The retail food industry, in which our Concepts compete, is made up of
supermarkets, supercenters, warehouse stores, convenience stores,
coffee shops, snack bars, delicatessens and restaurants (including the
QSR segment), and is intensely competitive with respect to food quality,
price, service, convenience, location and concept. The industry is often
affected by changes in consumer tastes; national, regional or local economic
conditions; currency fluctuations; demographic trends; traffic patterns;
the type, number and location of competing food retailers and products;
and disposable purchasing power. Each of the Concepts competes with
international, national and regional restaurant chains as well as locally-
owned restaurants, not only for customers, but also for management
and hourly personnel, suitable real estate sites and qualified franchisees.
Given the various types and vast number of competitors, our Concepts
do not constitute a significant portion of the retail food industry in terms
of number of system units or system sales, either on a worldwide or
individual country basis.
Research and Development (“R&D”)
The Company operates R&D facilities in Shanghai, China (China Division);
Plano, Texas (KFC and Pizza Hut Divisions); Irvine, California (Taco Bell
Division); Louisville, Kentucky (KFC U.S.) and several other locations
outside the U.S. In addition to Company R&D, we regularly also engage
independent suppliers to conduct research and development activities
for the benefit of the YUM system. The Company expensed $29 million,
$30 million and $31 million in 2015, 2014 and 2013, respectively, for
R&D activities.
Environmental Matters
The Company is not aware of any federal, state or local environmental
laws or regulations that will materially affect its earnings or competitive
position, or result in material capital expenditures. However, the Company
cannot predict the effect on its operations of possible future environmental
legislation or regulations. During 2015, there were no material capital
expenditures for environmental control facilities and no such material
expenditures are anticipated.
Government Regulation
U.S. Operations. The Company and its U.S. operations are subject to
various federal, state and local laws affecting its business, including laws
and regulations concerning information security, labor and employment,
health, marketing, food labeling, sanitation and safety. Each of the Concepts’
restaurants in the U.S. must comply with licensing and regulation by a
number of governmental authorities, which include health, sanitation,
safety, fire and zoning agencies in the state and/or municipality in which
the restaurant is located. In addition, each Concept must comply with
various state and federal laws that regulate the franchisor/franchisee
relationship. To date, the Company has not been materially adversely
affected by such licensing and regulation or by any difficulty, delay or
failure to obtain required licenses or approvals.
International Operations. The Company’s restaurants outside the U.S.
are subject to national and local laws and regulations which are similar
to those affecting U.S. restaurants. The restaurants outside the U.S.
are also subject to tariffs and regulations on imported commodities and
equipment and laws regulating foreign investment, as well as anti-bribery
and corruption laws.
See Item 1A “Risk Factors” for a discussion of risks relating to federal,
state, local and international regulation of our business.
Employees
As of year end 2015, the Company and its subsidiaries employed
approximately 505,000 persons. The Company believes that it provides
working conditions and compensation that compare favorably with those
of its principal competitors. The majority of employees are paid on an
hourly basis. Some employees are subject to labor council relationships
that vary due to the diverse cultures in which the Company operates. The
Company and its Concepts consider their employee relations to be good.