Why Yum! Brands Is Rushing to Revamp Its Fast-Food Image

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Yum! Brands (NYSE: YUM  ) is struggling with slowing growth lately as the fast-service chain continues to lose favor to fast-casual eateries such as Chipotle Mexican Grill (NYSE: CMG  ) and Panera. People want healthier food, even if it means paying slightly higher prices. This has helped the fast-casual sector become the fastest-growing segment in the restaurant industry today -- even as fast-food joints suffer. However, with more people choosing the fast-casual dining format over fast food, Yum! Brands is rethinking its approach... starting with a makeover of its KFC brand.

Healthier bites
Next month, Yum! Brands owned KFC will begin testing a new restaurant format it calls KFC eleven. Instead of its classic fried chicken, KFC eleven locations will offer fresh menu items such as chicken flatbreads, rice bowls, and salads , as well as higher margin items like fruit smoothies . The company's first KFC eleven location is set to open on Aug. 5 2013, in KFC's hometown in Louisville, Kentucky .

This could be a big win for Yum! Brands, particularly as it is the company's first foray into the fast-casual category that has worked so well for Chipotle. Similar to Chipotle, the food at KFC eleven restaurants will be made to order and prepared in front of customers, according to Bloomberg. Chipotle, which practically invented the fast-casual category, is one of the best-performing restaurant stocks this year.

In fact, the fast-casual stock recently rocketed to a new 52-week high of around $406 a share last week. The move was compliments of Chipotle's strong second quarter, in which the company beat analysts' expectations on both the top and bottom lines. Much of Chipotle's success is thanks to its reputation for high-quality ingredients. Last year, Chipotle generated $2.7 billion in sales -- making it one of the largest companies at the fast-casual dining table, according to Morningstar.

Chasing growth
With the $30 billion fast-casual category growing at breakneck speed, it's not surprising that Yum! Brands wants in on the action. Specifically, sales in the fast-casual sector grew by more than 13% last year, whereas sales in the fast-food category grew just 5%, according to Technomic. Therefore, it's easy to see why KFC is testing this new restaurant concept.

Not to mention, if the company's KFC eleven format is a success, we could see Yum! test the fast-casual model with its other brands as well. Fast-food chains including KFC, Taco Bell, and Pizza Hut all fall under the Yum! Brands umbrella.

Yum! Brands' push into fast-casual dining could pay off down the road. However, for now I think investors are better served elsewhere. That's why I invite you to find out what other American companies are dominating the restaurant industry in this special free report.

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9/27/2016 4:01 PM
YUM $89.86 Up +0.34 +0.38%
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