E. coli-stung Yum sows safe-lettuce policy: Taco Bell's $20m in lost operating profit from outbreak prompts comeback plans

Nation's Restaurant News,  Feb 26, 2007  by Carolyn Walkup

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Louisville, KY. -- While admitting that a lettuce-related E. coli outbreak late last year cost the Yum! Brands' powerhouse Taco Bell chain $20 million in lost operating profit, Yum this month revealed remedial strategies that extend all the way to farms in California.

The company's tactics for restoring consumer confidence include its implementation of new layers of lettuce safeguards at the grower level to help prevent reoccurrences of the problems that beset Taco Bells in several Eastern states and hobbled the chain's sales nationwide.

"We have raised the bar in a number of areas, such as increasing the requirements for good agricultural practices involving testing water and soil, use of compost, fencing fields and increasing testing in the field before harvest," said Rob Poetsch, a spokesman for Irvine, Calif.-based Taco Bell Corp.

Taco Bell's 5-percent downturn in fourth-quarter same-store sales lett the overall Yum system, including Pizza Hut and KFC, with a 2-percent same-stere sales decline that gave Yum added impetus to emphasize Taco Bell's plan for marketing a steady stream of new products that would be launched during the next several months. Yum this month also outlined its aim to add more multibrand restaurants, especially pairing Taco Bell with KFC.

The company also gave new details about the broadening of a Taco Bell breakfast test that began in Southern California and is being extended to three unidentiffed markets early this year.

As for its unusual effort to plant new systems of lettuce protection directly in the growing fields, Taco Bell appears to be acting on chain president Greg Creed's pledge last December to spearhead a coalition of restaurant companies, government regulators and suppliers to improve systems to avert foodborne illness. However, officials did not give details of the costs or logistics involved in the lettuce safeguards, nor did they say how programs to increase fencing and in-field inspections, for example, were being monitored, or what the direct involvement of Taco Bell personnel might be. They also did not state how implementation of the in-field initiatives could be reconciled with the chain's previous statements that it had little if any influence over growers because it buys from produce vendors, not directly from farms.

But answers to such questions could come next month as a result of Taco Bell's role as the lead sponsor of a National Restaurant Association produce safety conference, set to take place March 29-30 in Monterey, Calif., near the Salinas Valley growing area, which is the epicenter of the nation's lettuce industry. The conferences aim to educate leaders at all levels of the food supply chain about efforts needed to improve produce safety comes as federal lawmakers are considering bills to consolidate into one superagency the functions of the nearly 15 government departments currently charged with overseeing food safety. Sen. Dick Durbin, D-Ill., and Rep. Rosa DeLauro, D-Conn., introduced their Safe Food Act in Congress Feb. 14.

DeLauro, new chairwoman of the House agriculture appropriations subcommittee, disclosed shortly after the E. coli incidents in December that she would make improvements to food safety a priority. Widespread publicity about Taco Bell customers falling severely ill in New York, New Jersey, Pennsylvania and Delaware briefly suppressed the chain's sales by an estimated 20 percent nationwide, and it ravaged branches in the Northeast, where sales in the third week of December temporarily dropped off by a reported 35 percent to 50 percent.

There were a total of 71 documented cases of E. coli infectious, but several hundred customers who did not seek medical care also reported symptoms. A similar outbreak also traced to tainted lettuce occurred around the same time at Taco John's restaurants in southern Minnesota and Iowa, sickening 81 customers.

David Novak, Yum's chief executive, said during a stock analysts' conference call this month that Taco Bell's 5-percent quarterly same-store sales drop was less than expected, but he admitted, "We're still not all the way back in the Northeast with Taco Bell." Novak said he expects the chain to regain its former strength in the second quarter and especially during the second half of the year.

Taco Bell's dramatic sales meltdown, while contributing to negative same-store results for Yum Brands as a whole, invited comparisons to same-store sales growth for the Yum system of 4 percent in the prior year's fourth quarter, when Taco Bell posted a 7-percent surge.

Stock analyst Mark Kalinowski of Buckingham Research warned in a research note that "with Taco Bell facing E. coli-related issues, and Pizza Hut continuing to struggle, the outlook for most of [Yam's] U.S. business--which generates about half the company's profits--does not encourage us."

Putting as positive a spin as possible on the expected lag in Taco Bell's full recovery, Yum forecast same-store sales growth of about 1.5 percent for all of 2007.