DEAR PARTNERS Were pleased to report that 1998 was an outstanding
year for Tricon, with solid progress made against every operational and financial goal we
set for ourselves. Perhaps this is best reflected in your Tricon stock price, which soared
73 percent by years end, making it an excellent investment by any standard. More
importantly, weve set the stage for 1999 and beyond, and are confident we are
executing against the key growth drivers that we believe will differentiate us from every
other restaurant company in the world.
PERSPECTIVE ON 1998 We clearly
ended 1998 with tremendous momentum. For the first time in nearly a decade, all three of
our brands in the U.S. delivered positive same store sales growth for the full year. We
believe this important achievement is the result of our focus on both operational
excellence at the store level and marketing innovation with new products and promotions.
Despite the financial crisis in Asia, our international business posted strong results,
with an 11 percent increase in operating profit. The growth was driven by our focus on key
markets, which allows us to build scale and rationalize General and Administrative
expenses, while expanding franchise opportunities elsewhere. Recognizing that two-thirds
of our international profit comes from just seven countries, we decided to substantially
reduce our equity markets from 27 to about 16 by the end of 1999, well on the way to our
goal of about ten equity markets.
This solid performance drove our store level
margins up nearly 200 basis points to 13.5 percent. About one-third of the improvement in
margins came from our base stores, while the balance of the improvement came from the
benefits of our portfolio actions and the strategic charge we took in the fourth quarter
of 1997. Our ongoing operating profit jumped 14 percent to $768 million, driven by
strong same store sales, the powerful growth in margins and higher franchise fees.
Importantly, our ongoing operating earnings per share grew 29 percent for the year.
We also forged ahead on our refranchising and debt reduction targets. Strong demand in the
market led to the refranchising of nearly 1,400 units almost equaling the record
number of units we sold in 1997. As a result, we made significant progress against our
strategy to reduce our ownership to 2025 percent of the system. The units
refranchised, together with the closure of 661 units, drove our company ownership to 32
percent by years end, six points below our 1997 ownership level. The $600 million we
received from the sale of these units, plus cash from our ongoing operations, enabled us
to pay down over $1 billion of debt last year, almost two years ahead of our original
target. As expected, worldwide revenues from company sales and franchise fees declined by
13 percent due to our refranchising efforts and unit closures.
In terms of marketing and innovation, KFC had
great success in the U.S. with Popcorn Chicken and Colonels Crispy Strips, giving
customers food on the go options in addition to the Colonels Original
Recipe and Extra Crispy chicken. KFC also re-introduced the Colonel in an animated
advertising campaign, raising awareness to a whole new level for chicken lovers. Taco Bell
hit a home run with its successful launch of Gorditas, reinventing the taco for the first
time since Taco Bells founder, Glenn Bell, introduced them over 35 years ago
not to mention Taco Bells little Chihuahua featured in its advertising and on the
cover of this Report. Meanwhile, Pizza Hut had a turnaround year,after introducing The
Sicilian Pizza to rave reviews.
Along with Pan Pizza, the most popular pizza in the world, Stuffed Crust and Thin n
Crispy pizzas, Pizza Hut is delivering on its commitment to serve The Best Pizzas
Under One Roof. Internationally, we had strong same store sales growth in major
markets like Mexico and the United Kingdom, and we built nearly 900 new units outside of
the U.S., primarily through our franchisees and licensees.
PERSPECTIVE We believe weve laid
the groundwork in 1998 for another powerful year in 1999. We expect system sales to grow
four to five percent, with the addition of 1,500 units, mostly by our franchisees and
licensees. Our company revenues will continue to decline, reflecting the loss of sales
from the units we sold or closed in 1998 and an additional 800900 units we expect to
refranchise in 1999. Franchise fees, however, should grow in the low teens as a result of
franchisees building new units and acquiring former company-owned stores. We anticipate
paying down about $400500 million of debt, reducing our balance to just over $3
billion by years end.
With cost savings, productivity enhancements
and volume leverage, we expect to generate about a 100 basis point margin improvement,
about half coming from our base stores and the other half coming from our portfolio
actions. We also anticipate reducing our G&A by about $50 million in 1999, despite
continued spending on necessary Y2K initiatives and other system enhancements. In total,
we expect our operating profit to grow in the mid-teen range, and when coupled with about
an eight percent expected decline in net interest, operating earnings should be up just
over 20 percent.
Our pipeline of new products and marketing in
1999 is far more exciting than it was at this time in 1998, beginning with the recent
successful launch of Pizza Huts Big New Yorker pizza. This new pizza,
introduced in time for the Super Bowl, drove all-time record sales at Pizza Hut and we
anticipate even greater results throughout the year. In the second half of 1999, KFC will
launch a delicious new line of chicken sandwiches, providing our U.S. entry into this $4
billion category in which we essentially have a zero share today, while strengthening our
lunchtime business. Taco Bell also will introduce a dinner-time value meal which will
enhance our after-5:00 pm business, complementing our strong lunch business. Overlaying
these new products will be an exciting, exclusive global restaurant tie-in with the new Star
Wars movie, Episode 1 The Phantom Menace, scheduled to premiere on
May 21 in the U.S. Well be encouraging our customers to visit all three of our
restaurant concepts with one blockbuster promotion.
So as you can see, were very
enthusiastic about our growth and financial prospects for 1999.
SET THE STAGE FOR
FUTURE GROWTH While weve given you
our perspective on the companys positive performance in 1998 and our outlook for
1999, we want you to know were focused on six Bold Goals to continue to
drive our business results well into the future. These bold goals will help shape our
First, we want to become
renowned for an ownership and recognition culture that drives the best results in the
industry. Lets face it: high employee
turnover in the food service business is a reality, often exceeding 200 percent per year
at the crew level. We believe the key to reducing this problem is highly motivated,
qualified Restaurant General Managers (RGMs), since theyre the ones leading the
customer-focused teams. Our RGMs are our Number One leaders. So last year we began giving
each of our RGMs a one-time, $20,000 stock option grant called YUMBUCKs, with the
opportunity to earn even more options based on their restaurants performance. Like
you, our RGMs now have an ownership stake in our company and thats helping improve
our business and reduce turnover.
Each of our restaurant companies has its own
unique program to recognize outstanding restaurant teamwork across its system. And
were pleased to tell you that our recognition culture knows no geographic
boundaries. From Bangkok to Boston, and London to Los Angeles, were having fun
recognizing our people who are driving customer satisfaction and getting financial
results. In Puerto Rico, for example, we dramatically reduced annual crew turnover by
establishing a recognition culture that rewards employees for delivering customer
Were also pleased that nearly 100 percent of Tricons top 500 leaders have met
or exceeded our internal stock ownership guidelines, demonstrating their confidence in our
growth potential and helping us achieve leadership continuity across the system. You can
bet were going to continue to do all we can to build an organization where every
tool from training and recognition, to compensation systems recognizes
winning performance, promotes ownership and establishes continuity. This improves
retention, drives performance and generates profits.
Our second goal is to drive
superior same store sales growth through differentiated brand positioning and innovation.
We have the dominant share of the chicken, pizza and Mexican quick service restaurant
(QSR) categories and have the three most recognizable restaurant brands in those
categories in the world. Our strategy to enhance that position is to capitalize on the
uniqueness of each brand through more product innovation, memorable retail advertising and
promotions, and service so good it drives sales. We also have a unique opportunity to
combine any of our three powerful brands into a single restaurant to give our customers
more choice and drive sales an advantage no other restaurant company in our peer
Third, we are working to improve the economics of our
restaurants enough to drive shareholder value. We recognize we need to run
each restaurant like its our only one. This means were going to continue to
sweat the details and exploit every opportunity we can find to drive margin improvement
the hard way, by being smarter and doing things better. One way we wont achieve
margin improvement is by shortchanging our customers.
To do all of that, weve been working
closely with our top-performing franchisees and company operators to find more effective
ways of attacking cost pressures. For example, we formed a unified food service purchasing
cooperative with our U.S. franchisees. This new $4 billion co-op is intended to leverage
system scale to drive down costs by purchasing food, paper goods and equipment for all our
U.S. restaurants across the Tricon system. Were also introducing new technologies to
simplify operations and improve service time. And were intensifying team training
and RGM coaching across the system.
On the store level, were committed to a
new program called CHAMPS (Cleanliness, Hospitality, Accuracy, Maintenance, Product
quality and Speed of service), developed by our international team and being introduced in
the U.S. in 1999 at our company-owned and many franchised restaurants. With CHAMPS,
well now train, measure and reward outstanding employee performance against a common
customer standard at all of our restaurants, enabling us to run our restaurants more
efficiently and effectively.
|Our fourth Bold Goal is to develop the most competitive, leveragable above-the-store cost
structure in the industry. Rather than duplicate effort across each of our
companies, were focused on a one-time, one-way execution wherever
possible, leveraging our enormous scale to weed out complexity and redundancy. We reduced
our general and administrative expenses by over $50 million in 1998, and plan to reduce
them by about $50 million in 1999, by doing things one-time, one-way.
||As an example, we consolidated most of our
Kansas support facility into our existing operations in Kentucky and Texas. We also
completed the consolidation of our television network media buying for all three brands,
making Tricon one of the dominant network advertisers in the U.S. and leveraging our
Another goal is to expand
the system aggressively and profitably by becoming a superior franchise company.
Over the next few years, we plan to take our company ownership down to 2025 percent
of the system by selling more of our restaurants to franchisees who are good, experienced
operators; and by strategically expanding our
system. Of the 1,500 units we expect to add in 1999, about 1,300 will be opened by our
franchisees and licensees. Although we already have more restaurants than any other
company, we still have tremendous growth potential in the U.S. and abroad.
This past August we held our first-ever U.S.
Franchise Leadership Summit, where company leaders and franchisees from all three brands
met to discuss our one-system approach, share best practices, and explore
cross-branded expansion opportunities. Our franchisees are as excited about our growth
potential as we are.
Our last Bold Goal is to build
a capital and asset structure that dramatically enhances shareholder value
what we also call YUM Value. YUM Value is the sum of three things: 1) we intend to
get more out of our existing businesses; 2) invest in high return businesses; and 3) exit
persistently low return businesses. Well continue to create YUM Value with a
sharpened focus on sales growth, margin improvement, strategic system expansion and
elimination of unnecessary or redundant initiatives that dont add customer or
PROSPECTS NEVER LOOKED
BRIGHTER Our Passion is to put a
YUM on peoples faces around the world with crave and rave food, comeback value and
with customer-focused teams. Our goal is to do that better than any other restaurant
company in the world. Its clear were aggressively executing against our goals,
both on the operational and financial front, and we believe weve created an
infrastructure to sustain our sales and profit momentum for the long-term.
As you read through the following pages, youll see a lot of beaming faces. The
people of Tricon have good reason to be proud. Their achievements are a true testament to
the success of our overarching strategy: invest in the people who will satisfy our
customers better than anyone, and profitability follows. Wed like to thank the more
than 600,000 employees across the Tricon system, our franchise partners and outstanding
Board of Directors for their dedication and inspired ideas throughout this important first
We expect great things in 1999, and well into the millenni-YUM.
From all of us at Tricon, YUM to you,