YUM wants to sell off some of the stores it has already developed. These stores are profitable, but the ROI is low. Collection of franchise fees is a very low overhead business. They may not make as many $$$ per store, but they also don't have the capital tied to it. That money can be used elsewhere. ROI on franchise fees is near 100%.

Brian,

I agree completely that the franchise business model is a clean, low-cost, cash-generating machine, but the revenue level is considerably lower. As a brand-lord, you get a flat rate, necessarily lower than moderate sales would return. It is a difficult model with which to grow an enterprise the size of Tricon.

If they continue refranchising, they set themselves a lower annual earnings bar than they have now. They cannot be surprised, then, that investors see a company that is shrinking rather than growing, and assign them an appropriately low P/E level.

The increased and stabilized cash flow is certainly worth something, but the lowered potential for growth scares investors off. And there is a downside. Franchisees could lessen quality standards and dilute the value of the brand. They can also go bankrupt individually more easily than they can collectively, and for reasons other than poor sales.

YUM can strike a balance between franchisement and ownership that proves profitable, but it is a tight rope, I think. The lack of brand growth generally doesn't help. Still, I think they've chosen the most viable path. I just wouldn't want to be in their shoes.

Fool on!
BrianZ

P.S. I really don't have anything against Tricon. I even like Taco Bell (though not their commercials). I just don't have a lot of confidence in their business, and I've got to write about something.