Yum! Brands, Inc. Steals a Page From the Chipotle Playbook -- Again

 

If you've never heard of Banh Shop before, take heed.

 

The new fast-casual restaurant concept may have only just opened its first two locations in Dallas last month, but one day it might be a household name. To be sure, Banh Shop offers a delectable menu centered around Vietnamese street-style "Banh Mi sandwiches," and already sports a solid four out of five stars from mostly rave reviews on Yelp.

 

Perhaps most notable for its growth potential, however, is that Banh Shop is owned by Yum! Brands (YUM 0.58%), the parent company of Taco Bell, KFC, and Pizza Hut. With more than 40,000 restaurants around the world to its name, few companies know better how to scale a successful brand than Yum!.

 

But while the Banh Shop concept would be fairly novel for most Americans who are more accustomed to Chinese or Japanese fare, it's worth noting Yum! Brands' move to diversify into higher-quality, fast-casual Asian food isn't exactly unique.

 

To be sure, Chipotle Mexican Grill (CMG +0.00%) opened its first fast-casual ShopHouse Asian Kitchen restaurant in Washington, D.C., just over three years ago. And it was hard to blame Chipotle investors for rejoicing then: At that point, it had already grown its core burrito-making empire into a multibillion dollar business of nearly 1,200 locations. If Chipotle could eventually build ShopHouse into another formidable national brand, it wouldn't be hard to see the value from an investment standpoint.

 

This also isn't the first -- or even the second -- time Yum! Brands has borrowed a page out of Chipotle's playbook. Back in 2012, Yum! hired celebrity chef Lorena Garcia to craft its higher-quality (and higher-priced) Cantina line of burritos and salads. And only last month, Yum! opened the doors to the first of another fast-casual concept dubbed U.S. Taco Co. Unsurprisingly, U.S. Taco Co. insists it uses ingredients that are "high quality, purposeful and responsible," which is an unmistakable emulation of Chipotle's "Food With Integrity" mantra. To Yum!'s credit, burritos are nowhere to be found on U.S. Taco Co's unique menu -- it focuses only on tacos, fries, and shakes.

 

But whether Yum! is technically following in Chipotle's footsteps won't matter much to most consumers. This brings up another important point for investors: Namely, that both Chipotle and Yum! Brands are simply planting seeds with their new fast-casual concepts to (hopefully) foster growth far into the future.

 

For example, while Chipotle has opened six additional ShopHouse restaurants over the past three years, it simultaneously opened more than 500 new Chipotle Mexican Grill restaurants. This year, it's on pace to add another 180 to 195 new Chipotle locations, and management last quarter stated the company has a "strong pipeline of potential sites going into next year and beyond.  

 

Why? Because Chipotle still enjoys industry-leading economics and growth prospects from its flagship concept. Each new restaurant requires a relatively small capital outlay, returns on invested capital regularly sit north of 23%, and Chipotle's steadily rising free cash flow (which stood at nearly $400 million last year) has enabled it to stay debt free while building a mountainous $1.1 billion cash hoard.

 

Meanwhile, one Yum! Brands exec told me recently the company could see scaling its current China restaurant base alone to around 20,000 locations over the long term -- mostly comprised of KFC and Pizza Hut locations -- or more than triple their current total. Earlier this week, Yum! reaffirmed that it's on track to add 700 new KFC and Pizza Hut locations in China this year, even despite extended weakness caused by bad publicity surrounding a now-former supplier. Considering that massive long-term roadmap and the fact China still represented around 37% of Yum!'s operating income last quarter, it's hard to blame the company for staying the course.

 

That's also not to mention Yum!'s efforts to double domestic Taco Bell sales to $14 billion by 2021, thanks to a combination of new dayparts like breakfast, as well as plans to open more than 2,000 new Taco Bell locations in smaller towns throughout the U.S. As it stands, Yum!'s Taco Bell and KFC divisions outside of China both just enjoyed a 3% uptick in same-store sales growth, which went a long way toward appeasing less-patient investors.

 

As long as both Chipotle and Yum! Brands have their hands full with growth opportunities for their current core brands, these freshly opened fast-casual names will only to serve as an early preview of what we can expect to see in the very distant future. In either case, I'm convinced that management thinking so far ahead should be a huge encouragement for investors with a proper long-term view.