Part of the market believes that McDonald's (MCD 1.42%) recent weakness in U.S. store sales is attributed to the entry of Yum! Brands' (YUM 0.60%) Taco Bell into the breakfast market. The company has been aggressive when it comes to marketing its new line of products. So has Taco Bell cut deep enough into McDonald's breakfast market share to slow its growth in the U.S.?
McDonald's management has attributed the slowdown in sales in the U.S. to "ongoing broad-based challenges." But it remains possible that the breakfast push by Taco Bell, focused on younger consumers, is contributing to market-share losses in McDonald's stronghold of the breakfast market.
The Taco Bell breakfast push
At the end of May, Taco Bell introduced a new breakfast menu across 5,500 restaurants as well as a new national marketing campaign aimed directly at McDonald's. Meanwhile, its aggressive pricing is just another effort to take market share.
This is the biggest bet that the chain has made to date in the competitive "day" part of the fast-food industry. Taco Bell has long been a leader in the late-night menu. The new breakfast menu is being positioned as a "value" alternative to other established brands.
Meanwhile McDonald's announced that global comparable sales increased by a mere 0.9% in May, with the U.S. down by 1%. The company is working to stabilize the U.S. market with promotions such as its dollar menu and relatively new breakfast items, including the McCafe. Pricing has a greater influence on the average check than the product mix, hence the reason McDonald's is focusing on the dollar menu.
Taco Bell and its competitors
The "quesarito" is Taco Bell's latest offering. This item appears to be just one of many coming to market in an effort to lure customers away from Chipotle Mexican Grill (CMG 0.17%). However, while Taco Bell was first in putting the item on its menu, this item is already available at Chipotle. It is part of Chipotle's "hidden menu" and must be asked for specifically. However, Taco Bell is cheaper with prices ranging from $1.99 to $2.99, whereas prices at Chipotle are between $6.65 and $11.
Sales for the first quarter were flat for Taco Bell, with a 1% increase in volume offset by a 1% drop in same-store sales. On the other hand, both Chipotle and Qdoba reported impressive revenue growth. Chipotle reported a revenue increase of 24% and growth in same-store sales of more than 13%. Qdoba reported an increase of 7% in system-wide sales and a double-digit increase in its catering business.
Taco Bell's moves outside of the breakfast business
Taco Co. is a new fast-casual concept by Yum! that is making its debut in California. The fast-casual dining concept will be nothing like Taco Bell in terms of menu and prices, offering a fusion of Mexican and American cuisine. The focus will be on tacos, fries, and shakes, and prices for a complete meal will be around $12. This will ensure that there is no direct competition with Chipotle.
Yum! Brands' focus on emerging markets
The company remains focused on emerging markets, with 86% of its new 250 stores located in these markets, including India, Pakistan, and Indonesia--in fact, over 120 were in China alone. Yum! remains the largest foreign brand in China, with 4,600 KFC stores and 1,300 Pizza Huts operating across 950 cities. Meanwhile, Taco Bell drives its U.S. operations.
Taco Bell remains an important part of Yum! and contributed 21% of its total operating profit last year. The Taco Bell CEO was named CEO of Yum! Brands back in May. Last quarter, Yum! Brands grew net income by 18%. Most of this growth was abroad, with China alone seeing a rise of 80% in operating profit.
As far as valuation goes, Yum! trades at the lowest P/E-to-growth ratio of the three, coming in at 2.3, while McDonald's is at 2.4 and Chipotle's is 2.6. Yum! also has the highest return on invested capital of the three; its ROIC is 25%, while McDonald's comes in at 20% and Chipotle at 21%.
Bottom line
Shares of Yum! Brands are down around 1% year to date. However, the restaurant company looks to be gaining ground in emerging markets, and results at Taco Bell are improving. For investors looking for a solid investment in the fast-food space, Yum! Brands is worth a closer look.
