Taco Bell ‘in it to win at breakfast’

by Monica Watrous
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LOUISVILLE, KY. — In the breakfast market, Taco Bell intends to eat McDonald’s lunch.

“We are not in it to be in breakfast; we are in it to win at breakfast,” said David Novak, chairman and chief executive officer of parent company Yum! Brands, Inc., during an April 23 call with financial analysts. “And we have great products today that have gotten us into the game. We have a lot more products that we can go to when we want to.”

Launched March 27, the national breakfast platform is off to a great start, with “tremendous buzz around our advertising and products,” the company said. Yum!’s marketing strategy has included an aggressive campaign against McDonald’s Corp., with a series of ads featuring real-life Ronald McDonalds endorsing Taco Bell’s morning menu.

The advertising campaign is part of efforts to build awareness of the new a.m. offerings. Yum! said many customers in test markets didn’t know about the breakfast platform offered locally until the national ads surfaced. Generating trial of the products may be the biggest challenge.

“I think what we learned the last couple years is we can get a profitable proposition, but it’s really going to be challenging to break through the clutter and get people to be aware of your breakfast offerings and get them to try,” he said. “And I think the good news is… we’ve learned this from test markets and also with the launch: People love our product.”

He described the A.M. Crunch Wrap, which includes scrambled eggs, cheese, a hash brown and creamy jalapeño sauce with the choice of sausage, bacon or steak, wrapped in a flour tortilla and grilled flat, as “the most portable breakfast product in the category.”

“And it’s been tested up against a like product with competition, and we win with better value,” Mr. Novak said.

The Waffle Taco, which contains scrambled eggs, melted cheese and a sausage patty or bacon packed in a folded taco with a side of syrup, is “a novelty product in a sense that it’s so interesting,” he added.

Items also include A.M. grilled tacos, a sausage flatbread melt, and breakfast burritos. Cinnabon Delights, which are bite-size, frosting-filled pastries dusted with cinnamon sugar, round out the selections.

A two-year test in select markets taught Taco Bell that a strong coffee platform is a must for the morning meal.

“We have great coffee with flavored options, which people really like, and we think that segment will grow over time,” he said.

Part of the beauty of breakfast for Taco Bell is minimal investment. The company said the program was launched without significant capital expenditures.

“We want to emphasize that we know this is not a lay down,” Mr. Novak said.

Based on tests and early results of the launch, Yum! is targeting mid- to high-single digit mix for the day part.

“So, early days, I don’t want to get too excited about it because we know the challenge is immense,” Mr. Novak said. “But I’ve always said that if we can be successful at breakfast, and we fully intend to be, there’s no reason in the world why Taco Bell can’t go from 5,000 stores to 8,000 stores in the United States. So, our goal is to add that $100,000-plus concept layer that really takes an already high-returning business to a whole different level, and we get much more rapid new unit development.”

Other initiatives planned for Taco Bell include a mobile ordering program and “significant innovation” for the core business, with a major product launch planned for the second half.

“Our ongoing product innovation is backed by solid operations in strong unit economics, which allows us to open at least 100 net new units this year on top of 78 net new units we opened in 2013,” Mr. Novak said.

During the company’s first quarter, severe winter weather hampered U.S. performance, which included a 1% decline in same-store sales at Taco Bell. But strength in international markets lifted earnings and revenues.

Net income for the quarter ended March 22 was $399 million, equal to 89c per share on the common stock, up 18% from $337 million, or 74c per share, in the prior-year period.

Revenues totaled $2,724 million, up 7% from $2,535 million in the first quarter of the year before.

Global system sales grew 4%, driven by a 17% increase in China and 21% growth in India.

System sales from the KFC division increased 4%, driven by 2% unit growth and a 1% climb in same-store sales.

“(In) our developed markets, we have very solid businesses in Australia, and the U.K., which both delivered strong results in the first quarter,” Mr. Novak said about the KFC brand. “We’re really focused on spreading know-how and best practices from these two businesses to our underperforming markets in the United States and Canada.”

The Pizza Hut division posted even sales, reflecting 2% unit growth offset by a 2% decline in same-store sales.

“Same-store sales in the United States declined 5% in the quarter,” Mr. Novak said. “We launched a new and improved hand tossed pizza, but the news wasn’t strong enough to overcome value focused competitor activity. Looking ahead, we expect to fare much better with competitive value, our national advertising and WingStreet, and with product news like our new garlic Parmesan pizza offering. We also intend to do a better job engaging the digital consumer where competitors are frankly doing a better job driving activation. In fact, we’ve committed significant additional resources to our digital agenda, and I can assure you that we are moving forward with a high sense of urgency.”

System sales in the Taco Bell division also were flat, with 2% unit growth and a 2% drop in same-store sales.

“While the quarter was below our ongoing expectations, we remain confident Taco Bell has all kinds of mojo going forward as we expect another strong year,” Mr. Novak said.

In what it is calling its “bounce-back year,” Yum! expects to achieve at least 20% earnings per share growth in 2014.
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