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Yum to expand Taco Bell breakfast test


LOUISVILLE Ky. Even as Yum! Brands Inc. grapples with an E. coli outbreak linked to dozens of Taco Bell restaurants in at least five states, the quick-service behemoth is gearing up to revive its U.S. operations in 2007 after a lackluster 2006.

In a revitalization plan unveiled just before restaurant closures and lawsuits over the E. coli infections came to light, Yum officials said that an expanded test of breakfast at the Mexican quick-service chain in 2007 was central to their effort. If rolled out chainwide, the breakfast daypart could add $1.2 billion to annual sales for Taco Bell, which has 5,029 U.S. units, they said.

Other initiatives on the agenda include improving the lunch offerings and delivery operations at Pizza Hut, which has 6,214 U.S. units, and adding late-night operating hours at KFC, which has 5,335 domestic branches.

Yum executives told analysts and investors in New York at the company's annual conference Dec. 5 that they expected the revitalization efforts to increase U.S. blended same-store sales by 2 percent to 3 percent in 2007, compared with flat, or possibly negative, results anticipated for this year. The company's blended result includes data from the U.S. branches of its three core chains. Yum, which operates or franchises more than 34,000 restaurants worldwide, also is parent company to the A&W All American Food and Long John Silver's brands.

However, some analysts expressed doubts about the projected U.S. recovery, especially given the E. coli-related news surrounding Taco Bell.

"We think there could be a short-term, although potentially significant, negative sales impact at Taco Bell related to the chain's recent E. coli outbreak," Wachovia analyst Jeff Omohundro said in a research note dated Dec. 8.

Even before the Taco Bell outbreak, Yum's U.S. business, which contributes more than 50 percent of the corporation's profits, had been flagging compared with the Yum's international segments. For the latest quarter, ended in September, Yum posted a U.S. blended same-store sales dip of 2 percent from a year earlier. The company posted no same-store sales growth from a year earlier in its second quarter, and a 4-percent same-store sales gain in its first quarter.

double-digit rates, inciting one securities analyst to suggest that "the sizzle to the Yum story lies outside the United States."

Still, Yum officials were intent on showcasing the positive future for their U.S.-based operations. At Taco Bell, breakfast items that are already in test at certain units in Southern California will be expanded to three unidentified markets in early 2007, according to Greg Creed, president of the Irvine, Calif.-based chain.

Creed estimated that implementing breakfast could add up to $208,000 to average unit volumes, assuming Taco Bell is able to capitalize on its "fair share" of the $34 billion fast-food breakfast market. Taco Bell estimated it could garner a 1.8-percent share, versus McDonald's 20-percent share, Burger King's 4-percent stake, and Jack in the Box's 1.5-percent share.

Emil Brolick, president of U.S. brand building at Yum, said no one has assumed the breakfast daypart would be "easy or automatic," but that any opportunity to add even $100,000 to average unit volumes had to be considered.

"It is not lost on us that McDonald's has a strong position in breakfast, that Wendy's is testing and that Starbucks is expanding its offerings," Brolick said. "It's a daypart more and more people are looking to serve. But we believe we have a unique opportunity because while all the sandwich players are trying to one-up each other in the same game, we're going to play a different game."

He cited unique flavor profiles and "better" products, but did not elaborate on specific breakfast menu items. Consumer bloggers in Southern California have identified as breakfast items currently in test a sausage and bacon "Grilled Stuft" burrito; a southwest sausage burrito; an egg, bacon and cheese burrito; and cinnamon "Toastadas."

Officials also would not outline a timeframe for implementing breakfast at Taco Bell, or metrics the chain would need to hit in order to initiate a systemwide rollout. One securities analyst said breakfast at Taco Bell could become a reality in 2008, the same year Wendy's nationwide rollout is expected.

As for costs to the chain's franchisees, Taco Bell president Creed said only small wares and coffee equipment would be needed, minimizing expenses.

"It will take a very modest investment for us to capture what we believe is a very large opportunity," he said.

At Pizza Hut and KFC, fewer details were given on specific initiatives expected to spark sales, although executive cited new-product news, improved advertising, restaurant revitalization efforts and a focus on value, especially at Pizza Hut.

However, the revitalization program, which calls for systemwide KFC upgrades by 2008, would cause many franchisees to leave the system rather than swallow the costs of store overhauls. Yum executives said that would result in the closure of some 300 KFC branches in the next two years, curtailing the chain's net new-unit growth.

Analysts tended to concur this month that Yum faces an uphill climb in reforming its overall U.S. restaurant business.

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