China boosts Yum! again, Taco Bell continues to drag down U.S. sales

July 13, 2011 | by Alicia Kelso

Yum! Brands' profit in the second quarter was up 10 percent thanks, again, to huge strides made in China and strong overall results for the company's international division, particularly in emerging markets.

The Louisville-based company, which includes KFC, Taco Bell and Pizza Hut, released reports Wednesday for Q2 '11, ended June 11.

Highlights include a 25-percent operating profit growth in China, and an 11-percent profit growth at Yum! Restaurants International (YRI) prior to foreign currency translation.

Worldwide systems were up 3 percent, including 28 percent in China and 6 percent at YRI.

China continues to be a boon for the company, with an 18 percent same-store sales increase.

David C. Novak, Yum!'s chairman and CEO, said the development pipeline in that country is as strong as ever.

"China is thriving and our strategy is to build leading brands in every category. We have more confidence our brands are stronger than ever and positioned for sustained growth ahead," he said.

KFC and Pizza Hut in particular boost the company's presence in China. KFC generates strong sales (about 13 percent) from a breakfast daypart, and also from its 24-hour operations and delivery services. There are 3,400 KFC units in China, doubling the presence of its nearest competitor.

An expanded variety platform and semiannual menu refresh has boosted brand strength in Chinese lower-tier cities as well.

"Pizza Hut is on fire in China. It is the No. 1 Western casual dining brand in China and it is positioned to grow rapidly," Novak said. "It has the top growth in China, not just for our company, but in the entire restaurant category."

Yum! International Restaurants turn in solid quarter

Yum! also showed positive signs outside of China, and the company expects to have 1,400 new units overseas by year-end. International development continued in Q2, with 241 new restaurants opened, including the 99 new units in China.

Yum! International's system sales growth of 6 percent, operating profit of 11 percent and same-store sales growth of 2 percent was the result of new unit development, particularly in emerging markets. Yum! has more than 6,400 restaurants across 67 emerging countries.

"That is unmatched by our competitors. We are focused on Russia, India, the rest of Asia and into the African continent," Novak said.

KFC France has also experienced acceleration because of its simplified menus, a solid franchisee base and increased TV marketing exposure. Novak said KFC France has the highest unit sales than anywhere else in the world. "We intent to make a lot of money in France," he said.

With more than 700 units, KFC in the U.K. has been one of most consistent performers for YRI, turning in 21 consecutive quarters of same-store sales growth.

Pizza Hut U.K. has been admittedly soft, but the company's menu enhancements, including its free, unlimited salad promotion and new individual pizzas, as well as its casual dining focus, should yield a turnaround, Novak said.

"Yum International growth is on track and delivering solid results," he said. "We're pleased with the progress we're making and, longer term, we expect continued strong growth."

Domestic sales fizzle

Some of Yum! Brands' international results were offset by a 28 percent decline in U.S. profits, driven by higher commodity costs and a 4-percent decline in same-store sales.

These numbers were primarily due to Taco Bell's continued struggles, which are a continued effect from the now-dropped lawsuit over its beef quality. Although the claims were unfounded, attention from the lawsuit has continued to affect user frequency.

"We thought we'd be positive at Taco Bell by now, but we're not. The remainder of 2011 will be challenging and we expect slow improvement," Novak said. "We expect to improve on these very disappointing results by the fourth quarter."

To shift the momentum, Taco Bell has a new marketing campaign, a long-term growth plan and menu innovation plans for the beginning of 2012.

"We believe Taco Bell has innovation in the pipeline that will reenergize the brand, stabilize the business and get it back on track," Novak said. "Obviously these are unacceptable results. All hands are on deck."

Despite the disappointing U.S. results, he said the entire year forecast is expected to be a plus-12 percent. "We're confident our international strength will help us achieve our target for the entire year," Novak said.

Topics: Business Strategy and Profitability , Food & Beverage , Franchising & Growth , Operations Management , Pizza Hut

Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with, and has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, and Franchise Asia magazine.
View Alicia Kelso's profile on LinkedIn

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