On paper, Taco Bell seems like a bit of an outlier for parent company Yum! Brands (YUM 1.14%). The brand has struggled to take off internationally, including in markets like Dubai and Mexico , and its global footprint pales in comparison to its sister chains, KFC and Pizza Hut.

But Taco Bell is now taking a different approach to its international growth, and it just may be the right strategy to put the brand on par with its fellow Yum! brands, or at least contribute significantly to its parent company's revenues and profits.

International growth

Image source: Getty Images.

New international strategy

Taco Bell International President Julie Masino, who came on board in February 2020, has attributed much of the brand's current international momentum to Taco Bell's digital business. Taco Bell generates about 40% of its sales internationally through online and mobile channels, which positions the chain well in markets like the United Kingdom, which has the fourth-largest digital economy in the world. 

The company has also added strong franchisees who have "bought in on the brand," CFO Chris Turner said during Oppenheimer's recent 22nd Annual Consumer Conference.

Furthermore, the company has moved away from growing in many markets to focusing on scaling to 100 units in a few markets. That 100-unit threshold, executives believe, provides benefits of scale such as better supply chain support and stronger marketing and brand awareness.

During the company's Q1 2022 call in May, Yum! CEO David Gibbs said having this scale at a global level has provided the company with a competitive advantage that has helped the company and its brands grow even faster.

"Our new strategy to reach scale in a few key markets has driven brand awareness, thereby improving new unit returns that lead to accelerated growth," Gibbs said on the call.

In addition to the benefits of scale, having a strong global presence also allows the chain to be better protected against inflationary pressures. During the Oppenheimer conference, for instance, Turner said commodity and wage pressures are "much more subdued" outside of the U.S., which works in Yum's favor with less than half of its business operating against those domestic pressures.

Significant potential for Yum! Brands

Taco Bell's international plans are ambitious, with 1,000 new restaurants planned "within the very near future." 

As the fast food chain works toward that objective, marketing and brand awareness will be critical to get customers in new markets through the door for the first time. Chances are more consumers are looking for such an opportunity. Driven by a growing demand for convenience, the Mexican food market is predicted to increase globally by nearly $114 billion in the next five years, according to research and advisory company Technavio.

This demand could be a key driver in Taco Bell's international expansion, especially as its biggest competitor, Chipotle (CMG 1.00%), is just starting to form a global presence with a negligible number of units outside of the U.S.

That said, the potential is significant for Yum! Brands. Consider KFC's international presence of about 23,000 restaurants, versus about 4,000 in the U.S. That vast international presence explains how KFC generates about 51% of Yum's operating profits.  KFC continues to open over 1,500 new restaurants on average a year and, during the Oppenheimer consumer conference, Turner said the company thinks there could be up to 75,000 KFC locations around the world.

Of course, KFC might not be the best comparison given its strong brand equity and history overseas. The company was one of the first American fast food chains to expand internationally, opening in several markets by the mid-1960s. Taco Bell wasn't even founded until 1962, and it didn't extend beyond U.S. borders until 1973. Even then, it took 36 years for the brand to hit 160 international restaurants. 

Still, the timing seems right for the brand to accelerate given its increasing brand awareness, digital sales mix, consumer demand for Mexican cuisine and Yum! Brands' formidable global infrastructure and resources from which to leverage. If Taco Bell is able to beef up its overseas presence, it could add a material layer of profits to Yum's balance sheet and evolve into a major global player like its sister brands.