Yum Brands CEO David Gibbs and CFO Chris Turner hit the analyst conference circuit this month, touching often on the company’s next potential brand acquisition. Gibbs said he expects another “acquisition or two” in the next five years, while Turner noted just today that the benefits of scale are increasingly important in the industry.
Both executives said this (currently hypothetical) acquisition will be similar to Yum’s deal with The Habit Burger Grill, which came in early 2020, just before the pandemic turned the industry upside down. Essentially that means a smaller concept with a “growth opportunity we can unlock,” as Turner described. In fact, he said during the Oppenheimer Annual Growth and E-Commerce Conference today that part of the rationale for making the Habit acquisition in the first place was to “build integration muscle because we hadn’t done a brand acquisition in more than a decade.”
“We developed a great integration playbook … a lot of what we did worked very well. That stays as part of the playbook. We had some learnings on things that if we did another acquisition we would tweak in terms of the approach,” he said. In other words, the Habit acquisition, at an extremely precarious time, boosted Yum’s confidence about its next deal.
During last week’s TD Cowen Future of the Consumer Conference, Turner said any potential addition has to fit Yum’s RED (relevant, easy, distinctive) strategy, generate strong unit economics, create a “really logical” path for the company to continue leveraging scale – whether through franchise partnerships, technology or purchasing opportunities – and create clear shareholder value opportunities.
“We’ve seen several brands in the past couple of years that fit some of those, but the valuations just didn’t quite make sense so there wasn’t enough room to make for our shareholders,” he said. “It’s a high bar, but we will keep our eyes open.”
Of course, unit economics can be tricky to decipher for many of these smaller private companies, but let’s spitball some ideas on what Yum’s next concept could be anyway, shall we? To start, we know there are no gaps in the company’s portfolio for pizza, chicken, tacos or burgers, so any such brands are out. That leaves several categories up for grabs and here are five – and concepts therein – that could fit within this giant global system.
- Mediterranean
Yum execs’ latest presentation tour isn’t the first time we’ve heard about a potential acquisition. In October 2022, Turner said “the Mediterranean food space is interesting.” Indeed, at this moment in time, it is. Cava’s IPO is set to go live this week with a staggeringly high valuation but a high-growth opportunity that can’t be ignored. What could Yum grab to compete in this category? There are plenty of options, like The Simple Greek, Garbanzo Mediterranean Fresh, Taziki’s Mediterranean Café, The Halal Guys, and Pita Pit. Oh, also, Luna Grill grew its unit count by over 6% last year, its sales by over 16% and its average unit volumes by over 9%, according to Datassential’s Top 500. It’s worth noting that Luna Grill recently named Yum Brands veteran Steve Holliday as its COO, while its president Richard Pinnella also came from Yum, serving as VP and GM at Taco Bell for seven years.
- Asian
Asian food is the fastest growing cuisine in the U.S., but there just isn’t a lot of competition in the quick-service space. Essentially, Panda Express stands alone and its growth story in 2022 underscores the potential for the category. Panda Express generated $5.1 billion in sales in 2022, according to Datassential, which pushed it past Yum’s KFC on the Top 500 list. Panda’s unit volumes also jumped from $1.95 million in 2021 to $2.18 million in 2022. Notably, there are several full-service Asian concepts on Datassential’s list, like PF Chang’s and Benihana, but limited-service better fits the company’s model.
- Sandwiches
Thanks to Subway’s recent entry onto the market, the sandwich category has garnered much of the spotlight of late. We don’t think Yum will pony up the $9 billion or $10 billion asking price for Subway, especially since it doesn’t fall into that “smaller concept” definition. But, we do think the general growth in the sandwich category and the recent acquisitions of sandwich concepts from other giant restaurant companies – RBI’s 2021 acquisition of Firehouse, for example, or Inspire’s addition of Jimmy John’s in 2019 – create an intriguing competitive narrative.
Some high-growth, non-public concepts here include Jason’s Deli (about 250 units; $562 million in sales; nearly $2.3 million AUVs); Chicken Salad Chick (7.8% unit growth in 2022; 11% sales growth; about $1.3 million AUVs; differentiated enough from KFC’s fried chicken position); Penn Station East Coast Subs (finished 2022 with just over 320 units, $264 million in sales and $830,00 AUVs); Mr Hero, with about 110 units, $158 million in sales and $1.4 million AUVs; American Deli, with about 200 units, $153 million in sales and $760,000 AUVs; Capriotti’s, with about 145 units, $122.6 million in sales and $920,000 AUVs.
Also of note, Port of Subs’ AUVs grew by over 11% in 2022, while Cousins Subs grew its AUVs by over 8% and Ike’s Place grew its AUVs by over 9%.
- Bakery/café
The “bakery/café” category can perhaps blur into the sandwich category, but Panera’s recent acquisition of Caribou Coffee and Einstein Bros. Bagels opens up the field for other serious contenders as Panera seeks to go public again. Who could those contenders be? There aren’t a lot of options, but Corner Bakery is in the top 150. The chain lost nearly 16% of its units and over 8% of its sales in 2022 but gained over 9% in AUVs, according to Datassential’s data. Paris Baguette grew by over 25% to get to about 120 units, and its sales jumped by over 36%, while AUVs were up over 4%.
Au Bon Pain and La Madeleine French Bakery both retrenched their footprints in 2022, but La Madeleine gained in sales and AUVs, nonetheless. Same goes for Great Harvest Bread Co. Then there’s Mendocino Farms, which counts only about 50 units but generated nearly $164 million in sales in 2022 and a whopping $3.5 million in AUVs, according to Datassential.
- Coffee/beverages
And if there is a category that is really having a moment right now, it is coffee. Or, beverages in general. Credit Starbucks’ staggering and continued success and its proven ability to generate sales for a discretionary product despite an increasingly discerning consumer. Copycats abound, and Datassential’s Top 500 report showed just how strong this category has become. Sales increases ranged from 2.6% for 57-unit Dunn Brothers Coffee to 71.5% for Ziggi’s Coffee. You’ve certainly heard of Dunkin’ and Dutch Bros, but what about Scooter’s Coffeehouse, Black Rock Coffee Bar, Aroma Joe’s, 7 Brew, Biggby Coffee, Maui Wowi Hawaiian Coffee, or Clutch Coffee? (There are at least a dozen more fledgling coffee concepts in our collective inboxes sharing news about their growth). As my colleague Bret Thorn has pointed out, the growth in snacking in the mid-morning and afternoon dayparts has contributed to the category’s growth, as has the growing popularity of iced/cold coffee drinks.
What else?
There are several other categories that are also growing that could fill Yum’s gaps and check the company’s desired attributes. For instance, we haven’t touched snack concepts (though plenty of coffee/beverage brands satisfy that demand), barbecue, or the burgeoning (translation: high-growth opportunity) salad category.
And while brunch and eatertainment-type concepts are piquing consumers’ interest right now, we don’t think Yum will consider a full-service concept. For starters, Turner called QSR a great space to be in because of its mass appeal and value positioning. And, Yum is actively working to transition its Pizza Hut business away from dine-in to delivery/carryout formats. That said, for now, only time will tell how Yum's playbook will play out.
Contact Alicia Kelso at [email protected]