Yum studies McD's strengths in bid to boost U.S. sales: parent of KFC, Pizza Hut, Taco Bell to curtail co-branding, consider adopting rival's strategies

Nation's Restaurant News,  Jan 7, 2008  by Carolyn Walkup

Tags: Pizza Hut, strategy

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LOUISVILLE, KY. -- As the new year offers hopes for expanded prosperity, Yum! Brands Inc. begins an uphill climb to turn around lagging sales for U.S. branches of its 35,300-branch global empire, the world's largest system of restaurants.

Remarkably, the parent of the Taco Bell, Pizza Hut and KFC brands acknowledged last month that it was embarking on a new strategy to boost the chains' performances by turning a corporate eye toward emulation of better-performing rivals, particularly McDonald's. Yum also said it was curtailing its long-extolled strategy of co-branding its concepts under one roof, including combinations with its Long John Silver's and A&W All American Food concepts.

David Novak, Yum's chief executive, told a conference of stock analysts that he and his associates have studied McDonald's to see if any of Yum's three largest brands can adopt some of the burger behemoth's strategies. He concluded that Yum should be able to beef up sales and transactions through initiatives such as offering more snacks at off-peak periods, rolling out more health-oriented menu items, and, in the case of Taco Bell, expanding operations to include a breakfast daypart.

Among specific new menu items that Novak mentioned would be introduced either this year or next were pasta dishes and "healthier" pizza at Pizza Hut; grilled pressed sandwiches, slow-grilled chicken and milk shakes at KFC; and frozen beverages at Taco Bell.

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Novak also said Pizza Hut's co-brand concept WingStreet would be added to all 7,500 branches of the pizza chain, up from the current 1,000. Except for that rollout, multi-branding of two or more concepts under one roof, now comprising about 15 percent of the Yum system's U.S. restaurants, would no longer be pursued by the franchisor.

Novak's comments come at a time when many quick-service players fear a softening of sales, even though declines in consumers' disposable incomes suggest to some analysts that QSR operators would benefit from further trading-down moves by diners shunning higher-priced full-service restaurants.

According to Stuart Morris, a principal of QSR Consulting in Coronado, Calif., "Anybody's crazy not to emulate what McDonald's has done correctly. I give David Novak credit for saying what he did; I don't know that anybody else would be that frank about it."

Morris said a key issue for many QSR players is the need to exploit off-peak hours in order to boost same-store sales. "McDonald's is consistently busy at off hours--that's key--with coffee and snacks. McDonald's beverage initiative is brilliant."

McDonald's recently confirmed that it would gradually roll out espresso-based coffees, smoothies, sweet tea and other beverages as it expands an 800-unit test of a more extensive drink menu. Morris credited McDonald's with being smart to look at Starbucks Coffee for some of those ideas, and he noted that Dunkin' Donuts has benefited from broadening its slate of food and drink offerings.

However, other foodservice analysts expressed skepticism about the likelihood that emulating McDonald's would be the best strategy for Yum because consumers don't think of Yum's brands as 24-hour destinations.

Alan Hickok, restaurant industry financial advisor for Houlihan Lokey in Minneapolis, said Yum primarily needs to improve its operational basics and efficiencies to improve sales. "The best idea for 2008 is for them to focus on the basics--do it better than in 2007," he said.

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He chided Yum's leadership for promoting co-branding a few years ago, which Novak now says no longer will be emphasized. Criticizing the idea of co-branding, Hickok said, "There are no economies; it's operationally complex; you don't make more money."

Hickok also faulted Novak's mention of introducing more health-oriented menu items to each brand. "We don't go to KFC to eat healthy," he said. "I think that's misguided."

Some of newer products coming to Taco Bell, such as the Fresco Style salsa option, make sense, Hickok said. He noted that bad publicity from an E. coli illness outbreak traced to some Taco Bell units in the Northeast and a televised rat infestation at one unit in New York had hurt the brand's nationwide sales longer than expected.

"Taco Bell needs to stay out of trouble and stay off YouTube," he said. He also speculated that more upscale Mexican brands, particularly Denver-based Chipotle Mexican Grill, are cutting into Taco Bell's sales in some markets.

Hickok said he holds higher hopes for Pizza Hut, which he described as "news and product-driven."

Pizza Hut, however, has encountered tough competition from Domino's and Papa John's. With Domino's recently reviving its 30-minute delivery guarantee, Pizza Hut's delivery business could be adversely affected, some analysts are conjecturing.

Continuing economic stresses, especially high gas prices, a weak housing market and fears of a recession, are likely to reduce the number of dining-out occasions this year, including for quick-service restaurants, said consultant Dennis Lombardi of WD Partners in Columbus, Ohio. "People are trading down and trading out. There will be an increase in ready-to-eat and cooked meals from grocery stores until consumer confidence starts to increase again" he predicted.