The headline from Yum Brands earnings report Wednesday morning was the conflict in the Middle East weighing some markets down. The company reported a 5% drop in sales in Q4 at KFC restaurants in the Middle East, Turkey, and North Africa, while Pizza Hut sales in those markets also declined.
Of note, Yum Brands is the latest global restaurant company to experience mounting pressures from the Israel-Hamas war. Both Starbucks and McDonald’s also cited material impacts from the conflict.
Domestically, Yum’s Q4 same-store sales decelerated across all brands, with executives citing challenging laps as the main driver. Taco Bell’s Q4 same-store sales were positive 3%, versus Q4 2022 in which the brand’s same-store sales grew 11% buoyed by the return of the Mexican Pizza. Executives made a point to note that Taco Bell’s sales accelerated through the quarter and were up 5% in December 2023, however.
Meanwhile, KFC U.S. same-store sales were flat, Pizza Hut was down 4%, and The Habit Burger Grill was down 5%. For context, Pizza Hut gained 4% in Q4 2022 driven by the launch of its Melts platform, while KFC lapped a successful wraps rollout.
Executives believe Q1 will be the slowest quarter this year and expect “a range of initiatives” to provide sequential improvements as 2024 progresses. For KFC U.S., that includes the launch of its first loyalty program and its first bowl innovation since 2019 in its Smash’d Potato Bowl. For Taco Bell, that includes even more menu innovations this year. CEO David Gibbs said the company has a new product on deck every five weeks. Pizza Hut also has innovations coming up for its Melts platform, while The Habit is focused on improving operations and optimizing sales by harnessing Yum’s procurement group, which led to a 380-basis point increase in full-year store-level margins in 2023.
Across the global system, development and digital/technology remain the priority levers for Yum Brands. On the development side, KFC international continues to aggressively fill white space, opening a record 2,700 locations overseas last year, or about 10%-unit growth across 96 countries. Gibbs said the brand has an incremental opportunity to get to 50,000 KFC locations over the long term.
CFO Chris Turner said Pizza Hut also set record openings for the year, while Taco Bell opened 201 restaurants in Q4 and 417 restaurants in 2023.
“In the U.S., (Taco Bell) unit development is on fire, with 244 gross new units,” he said.
Overall, Yum opened 4,754 gross new units during 2023, or the equivalent of 13 restaurants a day and one restaurant every two hours. The company opened just shy of 1,900 units in Q4, with 87% of those coming from international markets.
The development engine is expected to continue churning in 2024 and beyond; Yum expects KFC to surpass the 30,000-unit mark in the first half of this year, and Pizza Hut to top 20,000. Gibbs made it a point to note that nearly 25% of Yum’s global restaurants have been built in the past three years.
“It gives you a sense for the condition of our asset base and how new it feels given the age of our brands, but also the commitment our franchisees have in this business,” he said.
Meanwhile, digital sales now make up 45% of the company’s overall sales, or about $30 billion. Gibbs called the digital business a low-single digit tailwind. Executives shared that the company is accelerating its proprietary technology to equip franchisees with capabilities that differentiate them from competitors, especially in emerging markets. Much of that acceleration, however, is also happening stateside.
Yum’s ecommerce platform has been deployed to KFC and Taco Bell U.S. and is currently onboarding at Pizza Hut U.S. The company will also start rolling out the system to two Pizza Hut international markets in the first half of 2024.
Kiosks also remain a priority for the company, as Turner said they drive higher tickets and streamline operations. There are now 500 KFC U.S. locations equipped with kiosks, while Taco Bell and The Habit have also rolled out the systems. Further, Yum’s proprietary point-of-sale system, called Poseidon, is now rolled out to 1,700 Taco Bell locations, and Dragontail, an AI-driven system that sequences orders for freshness and accuracy, added 1,000 locations in Q4 and over 4,000 throughout the year. In 2024, Dragontail is expected to launch in nearly 6,000 additional restaurants.
Yum has also added an AI inventory management system to a majority of KFC U.S. and Taco Bell restaurants, driving a more seamless and accurate inventory process, Turner said. More than 3,000 additional restaurants will be onboarded with this technology in 2024. And, the company is also adding a custom-built “super app” that provides routine tools for store-level managers to enable quicker decision making, recommended ordering for consumers, and more.
“It’s encouraging to see our digital ecosystem come to life. By the end of 2024, we’re likely to have Taco Bell U.S. operating all of these key technologies through Yum’s ecosystem,” Turner said.
“The talent we’ve been able to attract to digital space … We’re investing behind this. Franchisees are quickly adopting this. We’re at $30 billion in sales and growing fast. We’re still in the early innings of what this can do to the business and how it can transform us,” Gibbs added.
Yum’s position with a challenged U.S. consumer
Perhaps the most encouraging domestic takeaway from Yum’s earnings call is the company’s strong value proposition as U.S. consumers start to show signs of tightening their restaurant budgets. Quick-service peer McDonald’s reported earlier this week, for instance, that it has experienced a decline in transactions among lower income consumers, and industry-wide traffic levels continue to be negative.
Gibbs, however, is bullish specifically because of Taco Bell’s positioning, as the brand makes up a vast majority of U.S. sales and profits.
“Throughout 2023, there was a slight outperformance from our restaurants in low-income trade areas versus the rest of the business. With the low-income consumer, Taco Bell looks like it’s doing a great job holding on to them. It speaks to the strength of Taco Bell in this environment,” he said. “The Taco Bell business is set up to thrive in this environment.”
Contact Alicia Kelso at [email protected]
