This article is part of a multi-part story on Yum! Brands' newest marketing strategies. See more coverage here.
Taco Bell, the 5,195-unit chain that pioneered the quick-service Mexican segment, had achieved some same-store sales momentum through the end of fiscal 2010, notching gains of 1 percent, 3 percent and 4 percent, respectively, in quarters two through four.
Then on Jan. 19, the law firm of Beasley Allen Crow Methvin Portis & Miles P.C., filed a suit against Taco Bell alleging misleading advertising practices regarding the contents of its seasoned beef. The suit was withdrawn on April 19 and Taco Bell fought back with TV commercials, full-page newspaper ads and a free-Crunchwrap giveaway. But the damage to its brand image had been done.
Taco Bell’s same-store sales remained flat in the first quarter of 2011 and dropped 5 percent in the most recent quarter.
Taco Bell has been the principal driver of profitability for Yum’s domestic system, officials said during the latest earnings call. Much of that stemmed from a sharp operations focus and speed and accuracy at the drive-thru, Novak said. He added that sales in the United States are “driven by innovation and news,” and Taco Bell needs some time and distance from the lawsuit to regain.
“Taco Bell is a great brand,” he said. “We’re taking a hit right now, but I wouldn’t trade it for any other U.S. brand … Our pipeline hasn’t had a big news item in quite a while. But we’ve got things in test we’re excited about, and the innovation that drives the rest of the world could work at Taco Bell, and it’s coming.”
Taco Bell has been testing breakfast in a handful of markets for several months. Currently, its summer advertising revolves around its “Spend Less Summer,” which promotes products like the XXL Grill Stuft Burrito and the Taco 12 Pack.
Analyst take: “Taco Bell’s beef lawsuit was announced in late January, and trends at the brand slipped from plus-4 percent in period one to down 2 percent to 3 percent in periods two and three,” wrote J.P. Morgan securities analyst John Ivankoe. “This is understandable, but heavy PR did not work, and Taco Bell was down an even worse 5 percent in the second quarter. This result is thought to be the bottom — and it should be — as year-over-year total employment is up and the competitive-pricing environment is more favorable.”
Yum had identified Taco Bell as the potential growth vehicle in the United States, with potential for as many as 8,000 domestic restaurants.
However, “Until the company can demonstrate ‘best of class’ brand management under the ‘earn the right to own’ premise, we believe new-unit capital from Yum should be suspended in the segment and all efforts geared toward improving same-unit economics for both company and franchise stores,” Ivankoe wrote.
Watch Taco Bell's "Spend Less Summer" commercial.