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Taco Bell breakfast achieving profitability in first year

Sunday, Monday and Tuesday breakfast business at Taco Bell now outsells the brand's signature late-night daypart.

October 10, 2014 by Alicia Kelso — Editor, QSRWeb.com

Yum! Brands reported its Q3 results this week, including a familiar struggle at KFC China due to another supply chain crisis that dragged sales down for the company's biggest revenue business. Still, worldwide system sales were up 1 percent, with international and US markets offsetting much of this damage.

Yum's sweet spot for the quarter was Taco Bell, buoyed significantly by its fledgling breakfast platform. The brand's US same-store sales were up 3 percent.

"Breakfast sales are sustaining with the 6 percent daypart mix without the benefit of high level media weight. I would go so far to say we're one of the few companies in the history of the QSR industry to launch breakfast successfully and profitability in year one," CEO David Novak said during the company's earnings call.

The morning sales are largely incremental.

"But we are making money and sustaining it with margins of nearly 21 percent," Novak said, adding that McDonald's breakfast sales are 25 percent. "It killed me for years driving by all those McDonald's that are full before we even opened our doors."

Novak said that most people think of Taco Bell for its late-night daypart, but added that its Sunday, Monday and Tuesday breakfast business is now higher than its signature Fourth Meal.

"I think the best barometer about breakfast is our franchises are saying ‘stay on it.'"

Unit development is also providing a lift for Taco Bell, with 200 net new units planned this year, the brand's highest growth in a decade. Additionally, mobile ordering and payments will launch this quarter.

Deja vu in China

Novak spent much of this week's earnings call offering solutions on how to bounce back from KFC China's latest supply chain scandal, which dragged down company revenues by 3 percent in Q3. KFC China experienced a 14-percent decline in same-store sales; damage that reached beyond analysts' expectations.

Like the company's late-2012 supply chain crisis, in which chicken suppliers were caught ignoring regulations by using excessive levels of antibiotics in chicken, Yum's executives are back on defense, ensuring a full recovery in due time (executives say full recovery takes six to nine months) and implementing tighter controls.

"We terminated our relationship with OSI not only in China but globally. We also began taking unprecedented measures to further strengthen our supply chain practices in China to prevent and identify fraudulent and deceptive behavior by suppliers going forward," Novak said.

Yum! is now requiring all China suppliers to install closed-circuit TVs and creating a "whistleblower" system "to encourage suppliers' employees to report any potential food safety violations."

Novak also hinted at taking legal action against OSI to recover damages from the incident.

Despite the Q3 hurdle, Yum! will continue to rollout a new restaurant design and introduce new digital technologies. New menu offerings will be introduced in the first half of 2015, and the company expects to open 700 new units in that market this year.

"Even with our short-term issues we still have the economics to keep investing in aggressive new unit expansion. "The biggest thing we need to do is give it time and we are aggressively marketing the brand and hoping that time takes its course," Novak said. "We expect our bounce back to be strong."

Emerging markets' strong showing

KFC cruised through the quarter in its international business, increasing sales by 6 percent. The company expects to open 650 new units this year and grow operating profit by more than 10 percent. Markets in focus include "high growth countries" of South Africa and Russia.

"System sales were especially strong in emerging markets – up 12 percent led by Russia, Thailand and Africa. International developed markets also delivered solid sales growth – up 6 percent led by the UK, continental Europe and Australia," CFO Pat Grismer said.

In India, system sales were up 14 percent, driven by unit growth (26 percent) but partially offset by a 4 percent same-store sales decline.

Domestically, the KFC brand is "making progress," Novak said. Grismer added that the KFC US business delivered 2-percent same-store sales growth during the quarter.

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