and license fees increased $44 million or 12% in 1998. Excluding the special 1997 KFC
renewal fees (described below), 1998 franchise and ;license fees increased $68 million or
19%. The increase was primarily driven by units acquired from us and new unit development,
partially offset by the impact of store closures by franchisees and licensees.
Revenues decreased $558 million or 7% in 1997 primarily due to
Company sales decreases of $621 million or 8%. Excluding the impact of the Non-core
Businesses. Company sales decreased $496 million or 7%. The decrease was driven primarily
by the portfolio effect. The decline was partially offset by higher overall
effective net pricing. This pricing impact occurred primarily at Taco Bell, which more
than offset the impact of lower prices at Pizza Hut.
Same stores sales at KFC increased 2% in 1997 driven by
product promotions, favorable effective net pricing and increased delivery sales,
partially offset by lower transaction counts . Same store sales at Pizza Hut decreased 1%
for 1997, rebounding from a 7% decline through the second quarter. At Pizza Hut, lower
average guest checks in 1997 and decreasing transaction counts in the first half of the
year were partially offset in the second half by quality initiatives, increasing
transaction counts and the introduction of "The Edge" Pizza. Taco Bell same
store sales increased by 2% in 1997 reflecting the successful Star Wars and Batman
promotions, favorable product mix shifts and pricing, offset by lower transaction counts.
Franchise and license fees increased $63 million or 20% in
1997. In 1997, we generated $24 million of special KFC renewal fees. Substantially all of
KFC's franchisees renewed their franchise agreements, typically for 20 years, during 1997.
As part of this special renewal program at KFC, certain participating franchisees also
committed to attain over the next several years certain facility standards based on
physical assessment of that franchisee's restaurants. We believe these upgrades of the
franchised facilities will ultimately result in higher system sales and, therefore, higher
franchise fees. Excluding the special 1997 KFC renewal fees, our franchise and license
fees increased $39 million or 13% in 1997 The increase was primarily driven by units
acquired from us and new unit development, partially offset by store closures by
franchisees and licensees.
Our restaurant margin as a percentage of sales increased over 190 basis points in 1998.
Portfolio effect contributed approximately 75 basis points and the suspension of
depreciation and amortization relating to our fourth quarter charge contributed
approximately 40 basis points. Excluding the portfolio effect and the benefit of the
fourth quarter charge, our restaurant margin increased approximately 80 basis points. In
1998, we benefited from favorable effective net pricing in excess of costs, primarily
labor and commodity costs. Our labor increases were driven by higher wage rates, primarily
the September 1997 minimum wage increase, an increase in the management complement at our
Taco Bell restaurants and lower favorable insurance-related adjustments in 1998. Commodity
cost increases, primarily cheese and produce, were partially offset by a decrease in other
commodity costs. Our occupancy and other operating expenses were favorably impacted by
higher favorable insurance-related adjustments in 1998 and the decreased store condition
and quality initiative spending at Pizza Hut and Taco Bell. These favorable items were
partially offset by increased store refurbishment expenses at KFC in 1998.
Our increase in restaurant margin of almost 140 basis points in 1997 was driven almost
equally by effective net pricing in excess of increased costs, primarily labor, and the
portfolio effect. This improvement was partially offset by the effect of reduced
transaction counts. The higher labor costs were due to the increased minimum wage and to
costs incurred to improve customer satisfaction, partially offset by favorable actuarial
adjustments to workers compensation liabilities. In 1997, we also benefited from
lower commodity costs, primarily related to favorable cheese and chicken prices, and the
disposal of the Non-core Businesses.
OPERATING PROFITS from our Core Businesses, excluding facility
actions net gain and unusual charges, increased $150 million or 26% in 1998. The increase
was driven by reduced G&A expenses, higher franchise and license fees and restaurant
margin improvement partially offset by the absence of the special 1997 KFC renewal fees.
The decline in G&A was primarily due to the portfolio effect and a decrease in
restaurant support center and field operating overhead costs. Operating profits included
the benefits related to our 1997 fourth quarter charge of approximately $35 million, of
which $19 million related to the suspension of depreciation and amortization for the
stores included in the charge.
Operating profits from our Core Businesses,
excluding facility actions net gain and unusual charges increased $74 million or 14% in
1997. The increase was primarily due to higher continuing franchise and license fees, the
special 1997 KFC renewal fees and improved restaurant margin. The increases were partially
offset by an increase in G&A and other expenses.