Yum! Brands, Inc. Is Now Ready to Disrupt Fast Food Beyond Breakfast

Despite Yum! Brands' Taco Bell making continuous headlines over its new breakfast menu as it attacks McDonald's, Yum! is also making big moves outside of breakfast in an effort to compete for market share currently dominated by fast-casual chains like Chipotle.

May 28, 2014 at 6:00PM

In the past couple of months, Yum! Brands' (NYSE:YUM) Taco Bell has continued to make headlines after the debut of its breakfast menu on March 27. Taco Bell's marketing campaign has focused on attacking the fast-food king of breakfast, McDonald's (NYSE:MCD), while also informing customers about what differentiates its breakfast menu from its peers.

Despite the company's steady push on breakfast through its Taco Bell brand, Yum! Brands has also made strides with its other brands while developing newer concepts in an attempt to compete with fast-casual chains like Chipotle Mexican Grill (NYSE:CMG). In short, Yum! Brands is now ready to disrupt the fast-food industry well beyond breakfast.

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Yum! Brands is ready to go beyond breakfast now.  Credit: Michael Carter

Recent earnings highlight improvement opportunities
Yum! Brands' fiscal first-quarter earnings showed net income was up 18.4% to $399 million on sales that rose 7.5% to $2.7 billion. However, the majority of this growth was abroad where China saw operating profit rise 80% alone. In the U.S., same-store sales fell for KFC, Pizza Hut, and Taco Bell by 4%, 5%, and 1%, respectively.

In a similar fashion, McDonald's has struggled for several months in the U.S. Same-store sales fell 1.7% last quarter. April same-store sales in particular were flat despite a free coffee promotion the chain ran during the first two weeks of April in response to Taco Bell's breakfast debut.

Despite fiscal first-quarter revenue increasing 1% to $6.7 billion, McDonald's net income tumbled more than 5% to $1.2 billion.

Chipotle continues to be in its own class, as fiscal first-quarter net income increased 8.5% to $83.1 million and revenue soared 24.4% to $904.2 million. Unlike Yum! Brands and McDonald's, Chipotle keeps seeing double-digit growth in same-store sales. In the first quarter, same-store sales rose 13.4%.

With all three of Yum! Brands' core concepts seeing same-store sales declines, even as consumer spending at quick-serve restaurants grew 4.1% in April and beat March's 3.1% growth, the chain has plenty of areas to improve upon outside of breakfast.

Yum! Brands is making big moves outside of breakfast hours
U.S. Taco Co. is a new concept developed by Taco Bell executives that is making its debut in California. The fast-casual concept will have no semblance to Taco Bell in terms of menu or price. The menu will focus on tacos, fries, and shakes, while prices for a complete meal will be in the $12-$13 range.

Instead of competing directly with Chipotle's menu, U.S. Taco Co. will be a fusion- inspired menu that combines Mexican and American favorites to create meals unlike those offered anywhere else. It actually might be the right play; if customers feel it is a carbon copy of Chipotle, they may avoid U.S. Taco Co. for the higher prices alone, which would still be higher even after Chipotle raises its menu prices later this year.

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U.S. Taco Co.'s menu summarized: tacos, fries, and shakes.  Credit: U.S. Taco Co.

Testing fast-casual isn't new for Yum! Brands though. The company previously tested KFC Eleven, a KFC fast-casual concept. Earlier in April, the company tested Super Chix, a chicken sandwich-focused fast-casual concept. Plans are still under way for a fast-casual concept called Banh Shop, which will be centered around Asian subs.

Pizza Hut has gone high tech recently. In addition to the new interactive tabletop that lets pizza lovers visualize their orders and customize them on the spot, Pizza Hut is teaming up with Hulu, which will let customers order pizza through the video player.

In May, Taco Bell introduced its new Spicy Chicken Cool Ranch Doritos Locos Taco. The fourth offering within the brand's most successful product platform ever, Taco Bell has sold more than 825 million since March 2012.

Yum! Brands isn't skipping breakfast though
At the beginning of May, Taco Bell introduced its third round of breakfast ads that again attacked McDonald's. Taco Bell's Chief Marketing Officer Chris Brandt said the breakfast menu will be part of a bold goal to double the business by 2022.

Taco Bell is ready for Round 3 against McDonald's.  Credit: Taco Bell

However, the pace will need to increase for that to occur. CivicScience did a recent poll that showed just 4% of participants tried Taco Bell's breakfast through April 21; of those, just 3% said they would go back.

This may be the reason why Yum! Brands is spreading its resources out to capture the breakfast crowd. In India, Pizza Huts are getting Hut Cafes. In a country where more than 30% of the population is vegetarian, coffee seems like a no-brainer. Nevertheless, the possibility of having coffee with your pizza in the U.S. isn't out of the realm of possibility given coffee's worldwide popularity.

Bottom line
The most telling evidence of Yum! Brands' future outside of breakfast is the recent announcement that Greg Creed will take over the company as CEO in January 2015. Creed has played a key role in turning around Taco Bell in recent years, as he led the company's charge into intiatives like FourthMeal, Doritos Locos Tacos, and even breakfast. Given Creed's history with the company, and the state Yum! Brands' financials are currently in -- specifically with falling same-store sales in the U.S. across all three main concepts -- there is a good chance that Creed will take his ideas that worked so well for Taco Bell and make the same impact on the rest of the company.

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Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. 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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