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YUM – Taking Pasta to a whole different level

Initially, I did not pay much attention to the idea of rebranding Pizza Hut to Pasta Hut, because it makes no sense to me and seems to be a complete waste of money. Today, a story in the Korea Herald woke me up to the fact that YUM is actually going ahead with this strategy in some key international markets.

A restaurant concept that incorporates a type of food in its name will always have a difficult time diversifying to a broad based menu. Kentucky Fried Chicken incorporated the name KFC to get away from the stigma of fried chicken. Chick-fil-A sells chicken. Pizza Hut sells pizza. Pasta Hut will sell pasta. McDonald’s and Wendy’s can sell chicken, beef and fish because their names do not define and/or limit their menus.

Following on the heels of YUM’s national launch of pasta at Pizza Hut earlier this year, the Korea Herald reported that Pizza Hut is planning to rebrand three of its 330 restaurants in Korea to “Pasta Hut” in an attempt to broaden both its mid-range menu items and more importantly, its consumer base. All of the 330 units will include the new pasta offering on its menu, but only three units will be rebranded as part of the company’s marketing strategy as they are all located in high foot traffic areas.

Lee Seung-il, managing director of Pizza Hut Korea, stated that with the country’s pizza market believed to have hit saturation point that pasta offers menu diversity from both a taste profile and value standpoint. Lee hopes that pasta sales will account for 30% of Pizza Hut Korea’s next year’s revenues.

"This so-called 'shock' marketing strategy is aimed at raising consumer awareness that Pizza Hut specializes in dishes beyond the pizza," Lee told reporters. Pizza Hut used this same rebranding strategy in the U.S. back in April when it replaced all of its exterior signage at its Dallas headquarters with the new Pasta Hut logo and launched a national print and TV advertising campaign that stated “Pizza Hut is now Pasta Hut.” Pizza Hut followed with similar Pasta Hut rebranding efforts at its 700 units in the U.K. in October in a bid to overhaul the company’s image and menu. The fact that Pizza Hut Korea is now doing the same signals that the company’s pasta initiatives have been successful as a means to increase customer demand. As of YUM’s 3Q08 earnings call, management stated that its Tuscany Pasta has already become a $500 million brand in the U.S. and is on the way to become a $1 billion brand. The company also said that it plans to roll out a whole new line of pastas over the next couple of years.

The true success of Pizza Hut’s pasta launch is subject to whether these growing pasta sales are incremental to the company’s sales versus cannibalizing existing pizza sales and whether they are increasing overall profitability. Because as Lee stated, “For now, we're focused on capturing repeat customers, especially during these sensitive economic times." Right now, the company just wants to get people in its doors. Additionally, Lee said the company is willing to sacrifice a bit of profit-making to raise awareness that Pizza Hut is more than just pizza, which might imply that the pasta offerings do not generate the sale level of profitability. This brings into question YUM management’s statement from its 3Q08 earnings call that its pasta margins are slightly higher than what it earns on a “pure pizza.”

Cliff Diving: UK Economy Style!

Today’s PMI is just the latest nail in the coffin…

Manufacturing PMI data measured by the Chartered Institute of Purchasing and Supply was released today at the lowest level since 1992 with the Index registering at 34.36 in November, adding another negative data point to the crumbling UK housing market and banking sector. With industrial contraction, higher unemployment will inevitably follow (already Jaguar and Land rover have announced layoffs in UK facilities) adding political pressure on the BOE to cut rates further.

We are short the UK market via the EWU ETF. Not only do we continue to have a negative view on the current British economy structurally, we also see no catalyst for growth that could help fuel a recovery in the foreseeable future. Gordon Brown is levering up long at the wrong time.

Andrew Barber

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Eye On India: Singh Takes The Helm...

Singh is taking personal control of the Finance Ministry; this is a mistake…

Prime Minister Manmohan Singh probably understands the Indian economy more intimately than anyone else on earth. An Oxford PHD who served as both governor of the Reserve Bank and finance Minister, Singh’s leadership in the 1990’s set the stage for the miraculous rise of India as a major economic power. Taking the opportunity presented by the terrorist attacks in Mumbai, Singh has shuffled Palaniappan Chidambaram to lead the home ministry and assumed control of the finance portfolio personally.

The temptation for Singh is understandable, but the decision is foolhardy. With global demand in freefall and credit markets frozen, the potential impact on growth on the India’s economy and fragile society (where over 25% of the population lives in miserable poverty) is disastrous. Singh’s credibility as a leader may do much to restore confidence but, like a football coach that decides to suit up and run onto the field as quarterback himself, Singh’s decision to take on another ministry (he already runs six others) subverts the chain of command.

Singh’s decision will divide his focus during the most serious national security crisis his nation has faced in decades and will force him to manage the economy day-to-day while preparing for a tough election this year.

Export data released today by the Ministry for commerce shows what Singh is up against with a year-over-year decline of 12.1%, the first decline since 2001. If you read our post on Friday you know that we found Minister Chidambaram’s assertion that domestic demand will make up for contracting foreign markets absurd. Singh taking the reins may shore up investor confidence in the near term, but even he can’t fight the tide of cooling global growth.

We are short the Indian market via IFN.

Andrew Barber

LULU Nugget: Breaking My Own Rule

I can’t stand when people go into one or two stores and think that they can extrapolate sales for an entire chain. It’s near impossible to do accurately. But this is one example I could not resist.

Here are a couple photos from the store inside one of the most exclusive spa resorts in the US. Every garment of apparel was 20% off for the ‘pre-winter sale.’ This included The North Face, Marmot and Patagonia. The ONLY brand in the entire store not on sale was Lululemon. Why? “Because it is the only one we don’t have to discount” according to the manager.

China Update: Yuan and PMI

“Hank the Tank” is heading to Beijing …

When Secretary Paulson arrives in Beijing this week, a major topic of discussion will be currency policy. The Yuan has risen over 20% since the Chinese government allowed it to float in 2005, but in recent weeks the “Trend” has come under pressure. Friday’s decline of 0.7% to 6.8848 USD was the largest single day drop since the fixed exchange rate ended in 2005. Chinese rhetoric changed last week. They, like us, feel they have the right to let their currency depreciate in order to stimulate export growth.

“Hank the Tank” has been exceedingly diplomatic with Chinese leaders about currency manipulation throughout his tenure and in this final major financial summit between the two nations before the inauguration it is doubtful that he will change his tone in the final stretch. Hank “The Market Tank” is going to march into China and tell them to let their currency appreciate. The Chinese will smile and hear, but we highly doubt they listen.

For now the data continues to support a weaker Yuan, whether with the tacit approval of the government or not. PMI declined to 40.9 in November from 45.2 in October according to the CLSA survey released today, the largest one month decline since the survey started in 2004 (a separate survey run by NBS had comparable figures). As exports continue to cool, the Chinese case for a weaker Yuan (to sustain growth) is bolstered by massive state holdings in USD denominated assets: the amount held directly in US treasuries alone now exceeds 10% of GDP.

We are long the Chinese market via FXI; regardless of long term currency policy, we believe that in the near-term the equity market there will feel the benefits of strong government stimulus policies, competitive dominance in manufacturing and sustainable domestic demand growth.

Andrew Barber

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