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Why Yum Brands is buying Habit Burger

The company wasn't interested in something large, and Habit will give the company U.S. unit growth, says RB's The Bottom Line.
habit burger grill
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the bottom line

Early last month, Yum Brands made a surprising announcement: It was buying The Habit Burger Grill for $375 million.

It was surprising because it wasn’t quite the type of deal we expected. It was a lot smaller, in fact.

We have reason to be surprised, however. In 2018, now-CEO of Yum David Gibbs said “We have a very high bar” when considering acquisitions.

And a large chain made sense, particularly if that large chain did not have much of a presence outside the U.S. That would have given Yum something it could grow while providing it with a brand that could move the earnings needle right away. There had been routine speculation that it would make a big purchase.

But Yum was thinking differently. On the company’s fourth quarter earnings call this week, Gibbs said Yum simply wanted growth.

“This is a great risk-reward,” Gibbs said. “It’s a small investment. But we’re buying something that has a lot of growth potential.”

Two of Yum’s three existing concepts have shrunk in recent years. Even with Taco Bell’s 800-unit growth between 2013 and 2018, for instance, the company’s overall U.S. unit count contracted by about 200 over that time due to unit closures at KFC and Pizza Hut.

Yum wants to grow. Adding a high-unit-growth concept in Habit would give the company another domestic growth vehicle.

“We’re not interested in buying big businesses that are the same scale of ours that don’t have a lot of growth,” Gibbs said. “We’re looking for the upside that comes with that growth.”

For Yum, Habit is not a lot of risk. To put the $375 million into perspective, Yum generated $1.3 billion in net income last year alone and had $600 million in cash at the end of 2019.

By contrast, an acquisition such as Wendy’s would probably cost in the range of about $9 billion. Even for a company as big as Yum, that’s a substantial price for a brand whose main growth potential is outside the U.S., though Wendy’s is also adding breakfast, which on its own is a growth vehicle.

Neither of those are sure bets. Then again, neither is Habit—the burger market is ultracompetitive, and fast-casual burger chains have a mixed track record in the U.S. Habit itself has been growing sales through higher prices and lower traffic, which is potentially disconcerting for a growth concept.

But it was also a lot cheaper. And Yum remains confident its scale can take Habit to new heights.

“We think, given our scale and our capabilities, they match up with Habit very well,” Gibbs said. “We should be able to unlock growth, give our franchisees a great new growth vehicle in the U.S. and, given our ability to take things to international markets, take this brand outside the U.S. in a bigger way than we have already.”

“We really like the risk-reward in terms of the size of what we have paid to get something with the potential that this has,” he added.

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