Eastward Expansion

How Yum! Brands’ legal team supports a massive refranchising campaign on the Asian fast-food frontier

The global fast-food market was valued at $477 billion in 2013. It is projected to reach $617 billion by 2019. Yum! Brands has 57 stores per million people in the United States—but abroad, that presence isn’t nearly so pronounced. In the top 10 global emerging markets, Yum! operates just two stores per million people. $140 billion in market growth is up for grabs, and Yum! is looking east to seize its share. It has turned to Scott Catlett, associate general counsel, for legal guidance with a side of business savvy.

Yum! is a global leader in the chicken, pizza, and Mexican-style food categories. Its three core brands—Taco Bell, KFC, and Pizza Hut—have 41,000 locations (more than competitor McDonald’s) and operate in more than 125 countries. In 2007, Catlett’s team of lawyers and paralegals began the task of extensive refranchising: selling company-owned restaurants to franchisees. Refranchising company-owned stores in the United States has enabled Yum! to shift its investment from mature markets to higher-return emerging markets, such as those in China and India. More than 3,000 stores have been sold in hundreds of transactions since 2007, primarily in the United States. “This was the first mountain I had to climb,” Catlett says.

With a business largely based in bricks-and-mortar, Catlett has to consider monumental supply chain agreements, local and state regulations, and the risks inherent in large workforces. To manage all of the tasks of these transactions, he developed a system he likens to an assembly line. “We leveraged talented paralegals to work on point with airtight documents,” Catlett says. They also established close relationships with experts at mid-sized regional firms and cranked out the transactions one by one with minimal legal expense. The process has been notably smooth, Catlett adds, with no significant litigation or conflict and a host of flourishing new owners.

Catlett worked on mergers and acquisitions early in his career, and the experience gave him the perspective he’s needed to face the many hurdles of refranchising transactions. Among these are lending, real estate law, environmental issues, employment, and tax implications. “M&A experience in a firm teaches you project management skills,” Catlett says. “Working up to a closing is like cooking a seven-course meal. You have to direct all the other players so all their work gets done right and at the right time.”

The transactions between the quick-service behemoth and its franchisees are only the beginning of the complexity of Catlett’s work. Each of the company’s brands has a distinct business culture and market segments. “The franchisees are the lifeblood of our system,” Catlett says. “They are very influential, but it’s always a push-pull situation. There can be conflict, but when there is, we hope it ends up being constructive.”

There are distinct business objectives for each brand that play out in marketing, operations, and exposure. For example, Taco Bell’s customers are more likely to be millennials, who are more inclined to place mobile orders and use social media. “That increases the magnitude and speed of risk,” he adds, “but it’s also essential for our business.”

The nature of franchisees differs between the brands, as well. Catlett explains that, in the United States, KFC has many one- or two-unit owners who approach it as a family business. Pizza Hut and Taco Bell tend to have more multi-unit franchise organizations, with some owners holding as many as 1,000 stores.

Ultimately, the company succeeds because the owners are close to the customer and able to make on-the-ground decisions. “We are intentionally decentralized,” he emphasizes. “Decisions affecting the customer are best handled locally. To a great extent, our success in China over the past 25 years is due to our team there having significant autonomy.”

Yum! has 11 lawyers in the company’s Louisville, Kentucky, headquarters, with other attorneys distributed among division headquarters in Dallas; Irvine, California; and Shanghai, China. Because each brand’s origin and customer are different, the corporate culture and its functions necessarily vary. The 40 lawyers in the global organization engage in annual meetings, and a group of senior lawyers convenes more regularly, evidence of what Catlett says is a commitment to sharing know-how across an otherwise decentralized organization.

Still, the legal team sometimes feels like it’s serving two masters. It’s in the best interest of the company to drive solid deals when selling units to franchisees, but the franchisee is a critical part of the corporate parent’s long-term success. The local owner needs a transaction that enables a viable business. The franchisee also needs to be happy with the company that owns the brand. The legal team is a fulcrum of this balancing act.

“This is unlike the typical M&A situation,” Catlett notes. “Because we maintain a vested interest in their success, we can’t attach onerous clauses that make it difficult for [franchisees] to succeed.” Catlett exercises judgment in how hard to push. On the corporate end, while Yum! prioritizes return on investment for shareholders, it must keep a long-term, holistic perspective.

“Our philosophy is you have to earn the right to own the store,” Catlett says. “This applies as much to us at Yum! as to the franchisees.” This means the company doesn’t always sell stores to the highest bidder. “Just because one potential buyer offers a higher purchase price doesn’t mean he or she is the right partner for long-term success. There is a lot of judgment involved.”

This gets to the heart of what Catlett works to achieve at the company. “We are here to prevent messes and solve problems,” Catlett says. Creativity is an absolute must in this industry. “We try to enable the big things and mitigate risk from the rest,” he says. Business leaders, marketers, and product developers have their vision. Attorneys like Catlett help them achieve it.