Yum! Brands Q2: Taco Bell, KFC U.S. have new product momentum

Yum! Brands continues its recovery from China's avian flu and poultry supply chain issues that befell the company during the first part of this year, but its U.S. and international businesses are both on a solid growth path.

U.S.

The company's domestic business performed positively during the quarter, anchored by Taco Bell, which now contributes about half of the U.S. operating profit.

Taco Bell grew same-store sales by 2 percent in the quarter, on top of the 13-percent growth in the same quarter last year, which was driven by the Doritos Locos Tacos launch.

CEO David Novak said the Taco Bell franchise community is enthusiastic about the brand's Live Mas marketing campaign and new product platforms, including the Doritos Locos Tacos and the Cantina Bell line. Following the Nacho Cheese and Ranch Doritos Locos Tacos introductions will be the Flamas Locos Tacos, sometime later this year or early next year. The national breakfast launch is also planned for 2014.

President Richard Carucci said consumers have been driving the fast-paced Doritos introductions.

"As soon as we launched Nacho Cheese Doritos Locos Tacos, people were almost asking for Cool Ranch Doritos Locos Tacos. So we actually had to wait a little longer than we would have liked to, just because the demand was so great on the Nacho Cheese. We couldn't get the supply we needed to launch the Cool Ranch," he said.

Taco Bell is still evaluating the timing of the Flamas rollout, as well as potential follow ups to the "main three" flavors.

"I think after (Flamas) you'll probably see some more flavors, but they may be either in-and-out-type of ideas. We're obviously very excited about the results we've got as well as the future potential to add other flavors," Carucci said.

Novak said the Taco Bell brand is well-positioned now because "no one else" in the QSR space has this specific product.

"It's a platform that is totally unique to Taco Bell, and so every time we advertise it, whether we have product news or not, we're advertising something that no one else has," he said.

KFC also delivered same-store sales growth — 3 percent — during the quarter, driven in large part by the launch of its Original Recipe Boneless Chicken.

Carucci, however, said sales at Pizza Hut were weak (negative 2 percent) and the company needs to do a better job delivering a "compelling value message" like its competitors have done.

China

Yum's China division's operating profits fell 63 percent during Q2. Novak said that although the quarter was "extremely" challenging, sales and profits are in line with the company's expectations. The avian flu incidents are waning, which has, in part, helped KFC begin its recovery, according to CFO Pat Grismer. Same-store sales in June were down 13 percent, for example, compared to negative 26 percent in the second quarter.

"The negative impact of (the avian flu) peaked in mid- to late-April. In early May, the number of cases began to fall off. As a result, we began to see traffic rebound at KFC," he said. "We continue to expect that China sales will recover throughout the year and be positive in the fourth quarter."

The company launched a quality assurance advertising campaign in April to remind consumers of its commitment to quality, and has also launched a new value initiative focused on wings.

"We have significant news coming on the chicken front and we're also advertising protein alternatives that are available at KFC such as shrimp and mushroom rolls," Novak said.

The company will continue to leverage China's still-growing economy, expected to increase 7 percent this year. The consuming class makes up 300 million people today and is expected to jump to 600 million by 2020.

"It's still the fastest-growing economy in the world. These are things that bode well for brands that are consumer-oriented," Novak said.

YRI

In contrast to China, Yum Restaurants International had a strong quarter, with high growth in emerging markets such as South Africa, Russia and Thailand. YRI plans to open at least 1,000 new units this year, 90 percent of which will be franchised.

Carucci said the company's franchise fees reflect its "dominant presence" in high-growth emerging markets, which now account for almost 50 percent of Yum's revenue stream. Yum is also finding a foothold in new emerging markets such as Argentina, the Ukraine, Malawi, Angola and Outer Mongolia.

"This accelerated growth in net new unit count is significant for two reasons: First, 2013 will be the second consecutive year where we will generate 4 percent growth in YRI net new units. Second, this accelerating pace excludes India, which was a key growth driver for YRI before it was separated into its own division in 2012," Carucci said.

Yum's India division expects to open 150 new units this year, and double its restaurant count by 2015 to about 1,000 units. Sales in this market during the quarter were up 24 percent, driven by 25 percent unit growth and 2 percent same-store sales.

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