Yum! Brands Slip Up Went Unnoticed – Taco Bell Breakfast Flopped

During its earnings conference call, Yum! Brands discreetly but clearly warned.

Apr 30, 2014 at 5:30PM

For a company that was making a lot of noise about its new Taco Bell breakfast, Yum! Brands (NYSE:YUM) sure tried to be quiet about it during the conference call. McDonald's (NYSE:MCD) confidently dove right into to the topic when it hosted its call the same day, but both companies dropped more than a few clues. While it was already


Source: Yum! Brands

looking like Taco Bell's breakfast won't be a hit and may be a flop after all, one statement in particular confirmed the suspicion.

A few clues from McDonald's
McDonald's hosted its earnings conference call about 24 hours ahead of Yum! Brands. In it, CEO Don Thompson took a number of revealing swipes at Taco Bell and Yum! Brands. Normally you might think he was being defensive, but he made good points then shared some alarming thoughts.

In terms of quality, Thompson pointed out why McDonald's breakfast is superior. He stated, "We actually crack eggs, we cook in our restaurants. This is not a microwave deal, we actually cook. We have grills and fryers and ovens." He then made some dismissive comments about how major competitors "make a run" at breakfast every year, whether they are "sandwich shops or taco shops." Ouch. He went on to add, "There are entrants into the marketplace that don't have the same capabilities [McDonald's has.]"

One of the analysts during the Q&A just came out and asked if the Taco Bell breakfast is having an impact on McDonald's business. Thompson replied, "We have not seen an impact relative to the most recent competitors that entered the space." He even went on to suggest that Taco Bell's breakfast launch only brought more attention to quick service breakfast in general and may actually be helping McDonald's sell its own breakfast by expanding the quick service breakfast market.

Okay, so Taco Bell's breakfast isn't hurting McDonald's. How is it doing on its own?

Clues from Yum! Brands
First, Yum! Brands mentioned that although domestic same-store sales for Taco Bell in the first quarter were negative, the breakfast launch didn't happen until March 27 and the entire chain was negatively affected by the winter storms.

However, CEO David Novak then stated, "I am pleased to report we're off to a great start and we are generating tremendous buzz around our advertising and products." Notice he mentioned "advertising" before "products" as what's setting the buzz. Getting people to talk about Taco Bell's clever ads is one thing. Getting them to make the next step and come grab breakfast is another.

After being scarce on details, a number of analysts on the Q&A tried to get the company to talk more about breakfast. Novak responded to one, "Well, I think on the Taco Bell point, as you know we just launched breakfast, we're very pleased with the initial results. It's too early to really go in the details on that."

"Pleased with the initial results" seems eerily similar of McDonald's trying to play down its Mighty Wings flop a month after its launch when it said that the wings resonated with customers and met its internal projections.

You would think that if it were going well, they would talk that up a bit more. But that's not the clincher...

The clincher


Taco Bell Headquarters Source: Yum! Brands

The near-confession or runner-up to the clincher, came when Novak said, "It's really going to challenging to break through the clutter and get people to be aware of your breakfast offerings and get them to try. So we got to break major habits, I mean people have a tendency to do the same thing every day and so we got to -- it's hard to even to get our current users to give this a try." It sounds like the long version of: "We're not seeing much success with our breakfast launch since we can't even get our own hardcore fans to take us seriously."

The clincher came from CFO Pat Grismer at the tail-end of his prepared remarks. That may have been perfect timing to slip bad news in there because if you are like me, you often doze off by the end of the CFO's prepared remarks during a conference call. Grismer stated, "Taco Bell's year will be more of a first half, second half story as we continue to build momentum with this exciting brand."

Grismer grouped the second quarter, a full quarter of breakfast launch, with the disappointing first quarter. By dividing the year in half, he basically told you that the second quarter won't be much different than the first for Taco Bell, despite a full quarter of breakfast being served.

If you read between the lines, Yum! Brands believes that its breakfast business will pick up down the road and be a success but it's going to take some time to convert people. Novak even made mention that he was having trouble convincing his own franchisees and referred to each of them as a "Doubting Thomas."

Foolish final thoughts
To be fair to Yum! Brands, the stigma of a taco chain selling breakfast isn't something that can be easily be conquered overnight. McDonald's probably raised a few eyebrows too when it introduced breakfast nationally in 1977. A burger-and-fries chain selling breakfast?


Source: Yum! Brands

Today, that same burger-and-fries chain has a 30% share of the breakfast market and it represents 20% of its sales. It will be interesting to see where Yum! Brands is at with this in three months with the next earnings report and conference call. One problem as I see it is coffee. Taco Bell needs to get known for great coffee somehow and fast because most consumers these days think coffee first then food is secondary. I know I do.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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