Yum! Brands (NYSE:YUM) is the company that owns Taco Bell, Pizza Hut, and KFC. Overall, all three concepts are growing worldwide, but Taco Bell is the star domestically. Last year, the average unit for both Pizza Hut and KFC did under $1 million in sales in the U.S. while Taco Bell did $1.4 million. The Taco Bell figure was well shy of McDonald's (NYSE:MCD) $2.5 million and Chipotle Mexican Grill's (NYSE:CMG) $2.2 million, but if Yum! has its way, that is going to change.
The most important meal of the day
In terms of breakfast, Chipotle isn't even in the running. With the exception of an airport location or two, Chipotle isn't even open in the morning, so Taco Bell doesn't have to worry about that. The king of breakfast by a long shot is McDonald's, with market share of 30%. It's easy to find haters when it comes to McDonald's burgers and other fast food, but it's harder to find fault with its morning offerings.
Taco Bell is starting to show some signs of cutting in. Earlier this year Yum! launched breakfast at Taco Bell locations, and McDonald's kind of scoffed at the move. For example, McDonald's CEO Don Thompson back in McDonald's Q1 conference call in April stated,
[...] there has been breakfast competition for a number of years in the U.S. market. And we've had some of our major competitors [make a] run at breakfast, and it seems every year there is someone new ... making a run, and none of them have really stopped their focus on breakfast, whether [that's] the closer end and competitors, or if that's sandwich shops, or that's taco shops, or anything else.
The mention of "taco shops" was an obvious dismissive jab at Taco Bell. Earlier in the same call, Thompson said,
We actually crack eggs, we cook in our restaurants. This is not a microwave deal, we actually cook. We have grills and fryers and ovens. And so that's the reason that we're able to prepare breakfast.
It didn't sound like he was taking Taco Bell too seriously. That may have changed. In the most recent quarter, Taco Bell reported U.S. same-store sales rose by 3% and credited the breakfast launch, while at U.S. McDonald's, same-store sales slipped by 3.3%.
Thompson didn't have much to say about breakfast on McDonald's latest conference call, but Yum! CEO David Novak had a lot to say about breakfast during that company's most recent call:
I would go so far as to say we are one of the very few companies in the history of the QSR [quick service restaurant] industry to launch breakfast successfully and profitably in year one. Not only are our breakfast sales largely incremental, but we are making money and sustaining it with margins of nearly 21% in the quarter. Without question, we now have a great platform to grow from. Remember, McDonald's breakfast day part is 25%. So this gives us an opportunity to grow on that day part for many years ahead.
If there was any doubt who Yum! has its eye on in terms of taking breakfast market share, that doubt has been lifted.
Watch out, Chipotle -- you may be next
Nothing was said in the most recent call about the fast-casual Mexican chain Taco Bell is launching called U.S. Taco Co., probably because it is still in the early stages. It's a fast-casual high-quality premium Mexican food idea aimed squarely at millennials and quality-ingredient connoisseurs.
The chain aims to locally source its food. It mentions on its website hormone-free meat, no seafood farms, and "responsible ingredients," similar to Chipotle's claims. The marketing is also written with millennials in mind, with entree names such as "Winner Winner Chicken Dinner," "The Hot Chick," a Hawaiian dish called "Wanna Get Lei'd," and even a dessert called "Shut Your Pie Hole."
Early reviews on Yelp of the initial prototype restaurant seem quite favorable, or at least as favorable as reviews of Chipotle in the same area. Yelp is far from a scientific survey, but if the concept was an instant dud, you can bet the reviews would likely reflect that -- but they don't.
Will Yum! Brands succeed in taking a material bite out of McDonald's and Chipotle's businesses going forward? That remains to be seen. Given Yum!'s success with three very different concepts in its portfolio, I would say the threat is real enough to at least warrant keeping a close eye on.