Taco Bell Proves To Be A Culturally Relevant And Inflation-Proof Brand

The biggest takeaway from Yum Brands’ otherwise standard Q2 earnings call Wednesday morning is that Taco Bell is a star.

Sure, there were other highlights, like Yum’s global digital sales reaching nearly $6 billion and development continuing at a brisk clip with 781 gross new units on the quarter.

But there were also some disappointments, particularly in the U.S. market where KFC same-store sales declined by 7% after two years of positive growth. Also, Pizza Hut declined by 4% as the chain continued to navigate delivery driver shortages. Executives noted these performances are attributable in part because they lapped a strong Q2 2021 buoyed by stimulus checks and a popular chicken sandwich.

That said, Taco Bell also lapped those stimulus checks, yet the brand managed to turn in an 8% increase in U.S. same-store sales on the quarter.

The restaurant business is complex, so it’s hard to pinpoint a single factor for a standout performance like this. However, Taco Bell’s Mexican Pizza launch in May no doubt set the pace for a strong domestic quarter, despite selling out in about two weeks.

During the company’s Q2 earnings call, Yum CEO David Gibbs said Taco Bell had “exceptional execution of a well-balanced marketing agenda.”

“Taco Bell continues to fire on all cylinders,” he said, adding that the brand has cultural strength.

That strength is illustrated by the social media outcry and petition after the brand pulled its Mexican Pizza, as well as its enlistment of Doja Cat and Dolly Parton to help promote the return of the item.

New data from Placer.ai shows that the Mexican Pizza lifted traffic by over 63% after its launch. That traffic stayed elevated for the two weeks in which the item was fully stocked at restaurants.

Further, Gibbs said average loyalty registrations were 15 times higher than normal during the two-day promotion offering loyalty members early access to the product, while overall loyalty membership increased by 10% after launch.

Gibbs added that demand for the Mexican Pizza was seven times higher than previous menu appearances, and the company sold more than 20 million pizzas during the short window in which they were available.

“One of the benefits of things like the Mexican Pizza is its connection they have with consumers and the halo it provides for the brand. It’s about relevance as much as it is about sales,” Gibbs said. “That’s our formula. We’ve got to be the most relevant brand in the industry and connect with consumers. It really wasn’t about the exact sales contributing to the quarter as much as it was relevant and connected.”

Perhaps for good reason, then, Taco Bell announced this week it will bring the Mexican Pizza back Sept. 15 as a permanent item.

Pizza aside, Taco Bell is proving it is well-positioned in the current environment, which Gibbs called “one of the most complex we’ve ever seen.”

The brand has a strong digital presence to meet changing consumer habits, for instance, and it has long been a value leader in the quick-service category thanks to its Cravings Menu. The latter attribute bodes particularly well as consumers start to trade down.

“In the U.S., the low-income consumer pulling back has become more pronounced. We’ve seen that in our business and are reacting accordingly,” Gibbs said.

Taco Bell generates a bulk of U.S. operating profit, so its strong quarter is noteworthy given the softness of its sister chains.

Challenges at KFC and Pizza Hut

Domestically, KFC had to contend with comparisons from its 2021 chicken sandwich launch, which provided plenty of sales momentum and thrust the brand into the consideration set for a high-demand product.

As consumers start to rein in their discretionary spending, it’s also likely KFC took a hit from consumers returning to pre-pandemic behaviors. KFC’s signature bucket was a strong performer during the early months of Covid-19, when group occasions increased.

Pizza Hut, meanwhile, continues to struggle fulfilling demand as it simply doesn’t have enough delivery drivers. Executives discussed this challenge at length during Q1 and began integrating delivery as a service into its system, as well as adding restaurants to third-party delivery marketplaces.

At the end of Q2, 55% of U.S. Pizza Huts are now using delivery as a service, while 70% appear on at least one third-party marketplace. CFOCFO
Chris Turner said franchisees that are using both services are experiencing mid-single-digit higher sales than those that are not.

“There is an impact from reaching incremental customers and giving us delivery capacity to serve that (delivery) channel,” he said.

Pizza Hut is also working on internal solutions, such as creating a faster hiring process for drivers. The chain is also leaning into carryout sales, which experienced an uptick in the quarter, and a new $6.99 promotion to give customers “more breadth and range” on value.

Otherwise, heading into Q3, Yum plans to stick largely to its playbook–pressing the gas on digital and development while getting past “peak inflation.”

“Our formula is buzz, product news and value. We’ve got to deliver on all three. That’s how we’re planning,” Gibbs said. “Changes in consumer behavior aren’t going to get us off our game.”

Source: https://www.forbes.com/sites/aliciakelso/2022/08/03/taco-bell-proves-to-be-a-culturally-relevant-and-inflation-proof-brand/