Yum! Brands (NYSE:YUM) might be launching a chicken sandwich into space to bring more attention to its KFC brand, but the real moonshot for the restaurant operator is its plan to grow Taco Bell into a $15 billion business by vastly expanding its overseas presence.
Of the more than 6,650 Taco Bells already in operation, just 350 restaurants are located in 22 countries outside the U.S. Yum! Brands wants to grow the Mexican fast food chain to as many as 9,000 restaurants, and it wants to operate in 40 countries by 2022, a move it believes can grow sales by 50% from their current $10 billion level. That is a tall order.
Ringing the bell
While Yum! Brands is intent on growing all three of its chains -- it also owns Pizza Hut -- Taco Bell has been its most successful in recent years. Last year, even though it is the second largest chain in the system by sales and the smallest by store count, Taco Bell was the most profitable, with GAAP operating margin coming in at 11% compared to 7% for Pizza Hut and just 5% for KFC.
To expand the chain's footprint by a third, the restaurant operator will be boosting location openings to around 500 per year, well ahead of the 200 restaurants a year it had been delivering. And the company plans to focus on four primary international markets: Brazil, Canada, China, and India, where it will open at least 100 locations in each. Another 300 restaurants will be its urban Cantina concept, stores designed for city locations that cannot accommodate a full-sized restaurant and drive-through window. Accounting for the new countries it will also enter, that could mean as many as 1,500 new locations are destined for the U.S.
The question is, can the market support so many Taco Bells?
A taco stand on every corner
Expansion has been the bane of many competitors. Better burger joints such as Shake Shack and The Habit, for example, are stumbling from over-expansion, intense competition, and high prices for otherwise basic meals that are putting pressure on the fast-casual trend.
Although Taco Bell is traditional fast food, even the quick-serve industry has been unable to escape the malaise afflicting the restaurant industry.
Sonic ran up an impressive three straight years of quarterly same-store-sales growth before trouble reared its head. The company has now posted three consecutive quarters of negative comps. Similarly, McDonald's went three years without seeing any comps growth before finally breaking the streak when it introduced all-day breakfast, but that momentum has already stalled.
Flooding the U.S. market with more restaurants, as Yum! Brands will do, is a risky strategy. Restaurant traffic at U.S. restaurants continues to decline, down 3% in May, marking the 15th straight month of declines.
What's Chinese for "chalupa"?
International markets are likely the better bet. Yum! China (NYSE:YUMC) has exclusive marketing rights for KFC, Pizza Hut, and Taco Bell in the region, long the restaurant operator's biggest, most profitable market until it got swept up in several food scandals. However, the company still has plenty of experience there, and it should be able to get Taco Bell successfully up and running.
India, on the other hand, may be more problematic. Efforts to grow Taco Bell in that market have been met so far with nothing but losses.
In that context, the restaurant operator has also become more aggressive in its growth outlook. Just a few years ago, Yum said it wanted to grow the Mexican food chain to a $14 billion business by 2022 before upping the ante to $15 billion.
Certainly there is still a market for more Taco Bell restaurants, especially abroad. But investors will want to remain cautiously optimistic as the company attempts to grow revenue by 50% in five years, as the rapid expansion may end up causing some indigestion.