The headline of Yum Brands' earnings report on Wednesday morning was that the Middle East conflict was weighing on some markets. The company reported fourth-quarter sales at KFC restaurants in the Middle East, Turkey and North Africa were down 5%, with Pizza Hut sales in those markets also down.
Notably, Yum Brands is the latest global restaurant company to experience increased pressure from the Israel-Hamas war. Both Starbucks and McDonald's also noted the significant impact of the conflict.
Domestically, Yum's same-store sales slowed across all its brands in the fourth quarter, with executives citing tough margins as a key factor. Taco Bell's fourth-quarter same-store sales were up 3% compared to the fourth quarter of 2022, when the brand's same-store sales increased 11% due to the return of Mexican pizza. But executives noted that Taco Bell's sales accelerated through the quarter, increasing 5% in December 2023.
Meanwhile, KFC same-store sales in the U.S. were flat, with Pizza Hut's sales down 4% and The Habit Burger Grill's sales down 5%. For context, Pizza Hut rose 4% in Q4 2022 on the launch of its Merz platform, while KFC successfully rolled out Wraps.
Executives believe the first quarter will be the slowest quarter of the year, and expect “a range of initiatives” to lead to incremental improvements as 2024 progresses. For KFC in the US, this includes the launch of its first-ever loyalty program and its first bowl innovation since 2019 in the Smashed Potato Bowl. For Taco Bell, this year will include even more menu innovations. CEO David Gibbs said the company introduces new products every five weeks. Pizza Hut also plans to innovate for the Merz platform, while The Habit is focused on improving operations and optimizing sales by leveraging Yum's procurement group, which will help it achieve full-year store-level growth in 2023. This led to a 380 basis point increase in profit margin.
Across the global system, development and digital/technology remain a priority for Yum Brands. On the development front, International KFC continues to actively fill vacant spaces, and last year abroad he opened 2,700 stores, corresponding to a sales increase of about 10% in 96 countries. Gibbs said the brand has a gradual opportunity to expand into 50,000 KFC stores over the long term.
Chief Financial Officer Chris Turner said Pizza Hut also set new store opening records for the year, while Taco Bell opened 201 stores in the fourth quarter and 417 in 2023.
He said, “In the U.S., (Taco Bell) unit development is accelerating, with a total of 244 new units.''
Overall, Yum opened a total of 4,754 new units in 2023. This equates to 13 restaurants per day and one restaurant every two hours. The company opened just under 1,900 units in the fourth quarter, 87% of which were from overseas markets.
The development engine is expected to continue operating beyond 2024. Yum expects KFC to cross the 30,000 mark in the first half of this year and Pizza Hut to surpass 20,000. Gibbs highlighted that nearly 25% of Yum's global restaurants have been built in the past three years.
“It gives you an idea of the state of our asset base and how new it is given the history of our brand, but it also gives you an idea of how our franchisees are approaching this business.” he said.
Meanwhile, digital sales currently account for 45% of the company's overall sales, or about $30 billion. Gibbs said the digital business is a low-single-digit tailwind. Executives shared that the company is accelerating its proprietary technology to provide franchisees with features that differentiate them from competitors, especially in emerging markets. But much of that acceleration is also happening within the United States.
Yum's e-commerce platform has been deployed at KFC and Taco Bell in the US, and is currently being rolled out at Pizza Hut in the US. The company also plans to begin rolling out the system to Pizza Hut's two international markets in the first half of 2024.
Kiosks also remain a priority for the company, helping drive ticket growth and streamline operations, Turner said. Currently, 500 of his KFC stores in the United States have kiosks installed, and Taco Bell and The Habit have also installed the system. Additionally, Yum's proprietary POS system called Poseidon is currently deployed in 1,700 Taco Bell stores, and Dragontail, an AI-powered system that orders orders for freshness and accuracy, expanded to 1,000 stores in the fourth quarter. and added more than 4,000 stores throughout 2018. Year. In 2024, he expects Dragontail to be installed in nearly 6,000 additional restaurants.
Turner said Yum has installed an AI inventory management system in the majority of its U.S. KFC and Taco Bell restaurants to drive a more seamless and accurate inventory process. By 2024, he expects the technology to be installed in more than 3,000 restaurants. The company is also adding custom-built “super apps” that provide store-level managers with everyday tools that enable faster decision-making and order recommendations to consumers. more.
“It's encouraging to see our digital ecosystem come to fruition. By the end of 2024, Taco Bell US could be able to operate all of these key technologies through the Yum ecosystem.” Mr. Turner said.
“The talent we've been able to attract into the digital space…we're investing in this. Our franchisees are adopting this right away. Our sales hit $30 billion and we're rapidly growing. We're growing. We're still in the early stages of what impact this will have on our business and how it will transform us,” Gibbs added.
Yum's position on struggling U.S. consumers
Perhaps the most encouraging takeaway domestically from Yum's earnings release is the company's strong value proposition, as U.S. consumers begin to show signs of tightening their restaurant budgets. Quick-service peer McDonald's, for example, reported earlier this week that lower-income consumers are seeing fewer transactions, and traffic levels across the industry remain negative.
But Gibbs is especially bullish on Taco Bell's positioning, with the brand accounting for the lion's share of U.S. sales and profits.
“Throughout 2023, our restaurants in low-income trade areas performed slightly better than other stores. For low-income consumers, Taco Bell is doing well to retain them. “That speaks to the strength of Taco Bell in this environment,” he said. “Taco Bell's business is poised to thrive in this environment.”
Contact Alicia Kelso. [email protected]
