YUM Brands explores small formats, destination items and chicken delivery

Small formats, unique items and home delivery aren’t just popular with retail, they are also drawing the attention of restaurant giant YUM Brands who is seeking to breathe life into its Pizza Hut and KFC segments.

Louisville, Ky.,-based YUM Brands is a major food service customer of Tyson Foods Inc. and also does retail business with Wal-Mart Stores Inc.

David Novak, chairman and CEO of YUM Brands, said during a March 13 presentation at RBC Capital Markets Conference in Boston, that Yum is taking a page from the Taco Bell playbook to spur innovation into its sluggish casual dining formats. He said Taco Bell has enjoyed success with millennial consumers that the other YUM segments have not had. He admitted that Domino’s Pizza has outperformed Pizza Hut, something he hopes to reverse with the use of social media and smaller, more flexible formats.

Novak said the company plans to take knowledge gleaned from its social media insights at Taco Bell and infuse that learning into KFC and Pizza Hut to help drive sluggish sales.

Earlier this year, the company began testing the concept of Pizza Hut by-the-slice in two locations. And last August, the company opened KFC Eleven, an upmarket version of its fast-food chicken chain, with a menu of updated side dishes, salads, rice bowls, flatbread sandwiches and only boneless pieces of Original Recipe chicken.

“I think that the small-box format and fast-casual really has shown us that we can actually take our quality up, our pricing up and give people more even within our own formats,” Novak said. “But I think we are really going to unlock a lot of growth just by looking at the Subways and the Chipotles and the fast-casuals, the Five Guys. These kinds of concepts I think are showing us there's different ways to make money, and you can do it very profitably.”

FAST CASUAL WINNERS
According to Technomic's Top 150 Fast Casual Restaurant Report, fast casual makes up just 14% of the total $223 billion limited-service restaurant segment. However, its sales continue to outpace other operators.

Fast-casual sales increased 13% in 2012, and the largest chains — those posting more than $325 million in sales  — did even better, growing by 16%. Technomic notes that fast-casual restaurants continue to outperform quick-service and full-service establishments by posting strong gains while the rest of the industry is having a more difficult time.

"Fast casual has become a $31 billion segment since Chipotle began reinventing fast food 20 years ago," Darren Tristano, executive vice president of Technomic, said in a statement. "Consumers today want quality offerings made quickly. Segments like burger, sandwich and Mexican have done a great job delivering on quality, fresh, gourmet, and made-on-demand offerings. There are still areas of growth in the fast-casual segment for operators to adopt these ingredients for success and become viable in the fast-casual landscape."

The trend is expected to continue. While the compound annual growth rate for all limited-service restaurants is 4.5% (2012 through 2017), fast-casual operators are expected to grow 10%, on average, over the same period. The categories that saw the fastest sales growth were sandwich (up 17%) and Asian/noodle (up 16%), according to the Technomic data. 

Top players within fast-casual clusters include:
• Bakery café led by Panera Bread with sales of $3.7 billion.
• Mexican led by Chipotle Mexican Grill with sales of $2.7 billion.
• Chicken led by Zaxby's with sales of $979 million.
• Asian/Noodle led by Panda Express with sales of $1.8 billion.
• Better Burger led by Five Guys Burgers and Fries with sales of $1.1 billion.
• Sandwich led by Jimmy John's Gourmet Sandwich Shop with sales of $1.3 billion.
• Pizza led by Donatos Pizza with estimated sales of $157 million.

DESTINATION PRODUCTS
Last month YUM launched its Taco Bell breakfast platform taking on McDonald’s with its waffle taco loved by real-life Ronald McDonalds featured in television ads for the fast-food breakfast taco.

Novak said Taco Bell has worked on refining its breakfast menu for five years. He said the waffle taco and the resurrection of the KFC Double Down, bun-less chicken sandwich, are destination products.

“We have products that we think are destination driven at what we think is very, very good value,” Novak said.

Analysts are lukewarm on the wacky menu items saying they could drive consumer interest and traffic in the short-term, but noted that consumer trends point to fresh, healthier and “made to order” items faring better over the long-term.

J.P. Morgan downgraded YUM Brands on Monday (April 21) one day ahead of its earnings announcement noting the stock is overvalued at its current price of $75.98, with significant exposure in China and sluggish U.S. sales.

CHICKEN DELIVERY
“In the U.S. … we will be delivering our award-winning wings with plans to ultimately be the first home meal delivery service chain to offer up complete chicken meals that you can order to go along with your pizza,” Novak said. “We now have fryers in all of our Pizza Huts in the U.S., and this will be a major sales layer that we will launch.”

Since restructuring the organization at the beginning of the year, Novak said YUM’s new brand-focused approach has helped revitalize the global operations. He said each day KFC wakes up asking how they can attack McDonald’s market share and Pizza Hut does the same with Dominos.

The waffle taco by Taco Bell was a direct hit to McDonald’s lucrative breakfast market which is 25% of the company’s total U.S. sales.