With the exception of the juggernaut that is Taco Bell, Yum Brands’ second quarter results weren’t much to write home about, especially its domestic results. Its Pizza Hut, KFC, and Habit Burger Grill same-store sales all experienced a second quarter decrease.
To be sure, Yum is hardly alone here. The second quarter has been largely lackluster minus a few standouts (Chipotle, Wingstop, and Texas Roadhouse come to mind). The Dow Jones U.S. Restaurants and Bars Index reflects a slow recovery from an even more painful first quarter, as consumers have proven they’re fed up with high menu prices and instead spending their money at grocery stores or a super selective group of restaurant brands that have established a strong value perception (Chipotle, Wingstop, and Texas Roadhouse come to mind here, too).
There was a sense that things weren’t going to be easy heading into Q2 earnings, especially once industry bellwether McDonald’s reported its first same-store sales decline since the pandemic quarter in 2020. For Yum Brands, the quarter marked its second negative quarter in a row for three of its brands, including its flagship KFC U.S.
Still, Yum, like many of its peers, accentuated the positive, including a sequential improvement across its system. The question now is whether that sequential improvement will continue, and if it will eventually offset the decelerating trends we’ve seen throughout the past several quarters. From the little bit of color provided during Tuesday morning’s earnings call, we know that digital and other technology will continue to play a growing part in the company’s near- and long-term strategy, which has become somewhat of a turnaround strategy at this point.
Yum’s giant global system surpassed 50% in digital sales in Q1, representing about $30 billion in annualized, digital sales. That momentum continued in Q2 as the company entered the next phase of what it calls its “journey to be the leading global digital restaurant company.” This journey of course includes added investments, which the company is offsetting through “improved expense leverage” and an “ongoing resource optimization program,” which frees up general and administrative expenses for reinvestments into technology.
“We are confident the investments we are making in tandem to be more agile, resilient, and stronger as part of the next phase of our technology journey will lead to a promising year in 2025,” chief executive officer David Gibbs said during the call.
In other words, Yum is optimistic about 2025 because of this years-long focus on technology, which began in earnest shortly before the pandemic when the company established its Digital Innovation Lab. The focus accelerated during the pandemic and now, Yum is easing into the next phase, which is heavy on artificial intelligence and the development of proprietary platforms.
“We are accelerating deployment of our foundational platforms, such as the Poseidon POS system, Yum e-commerce platform, Dragontail, SuperApp and our Global Data Hub. In the next phase, we are focused on maximizing the value creation potential of our platforms through AI and leveraging our extensive data assets,” chief financial officer Chris Turner said, adding that data is a “crucial differentiator” that enables the company’s franchisees to make better decisions.
As part of that AI “value creation,” Taco Bell is accelerating AI voice ordering at the drive-thru to “hundreds” of U.S. stores by the end of this year. Turner said the pilot showed more consistent customer experiences and higher employee productivity. The technology also leverages digital menu boards, which will be a Taco Bell brand standard in 2025.
Further, Yum’s proprietary commerce platform is currently deploying to Pizza Hut U.S., while its Poseidon POS system is fully rolled out to Taco Bell U.S. and in the early stages of a KFC U.S. rollout. Dragontail, an AI-enabled restaurant management system acquired by Yum in 2021, is expected to be in the entire Pizza Hut U.S. system by the end of this year and has so far lifted customer satisfaction scores by 7%, leading to higher frequency. And, Yum partnered with an AI personalization startup in Q2 to leverage its own data assets.
“This partnership covers the application and integration of a deep learning AI approach known as reinforcement learning, which we expect to be broadly and easily scalable across brands,” Turner said. “This partnership will focus on our basic [customer relationship management] channels and in the future may extend to other consumer sales and communications channels.”
Gibbs said the benefits of Yum’s digital and technology strategy are increasing, helping to drive 10% core operating profit growth – a silver lining in an otherwise (mostly) tough quarter.
Contact Alicia Kelso at [email protected]
