KFC is a Global 'Development Machine'

Like usual, KFC was a “development machine,” in the first quarter of fiscal 2019, as YUM! Brands chief operating officer David Gibbs described it. The company opened 372 new restaurants in 46 countries during the quarter, bringing its global footprint to 22,886 locations (4,062 in the U.S.) with 6 percent net new unit growth. The vast majority debuted in international markets—363—and KFC also closed 107 locations (21 in the U.S. versus nine openings).

While these figures are pretty standard for KFC lately, its sales performance sailed expectations. The brand turned in its best growth in three years to pace YUM!’s Q1 results.

KFC reported systemwide same-store sales growth of 5 percent, year-over-year, building off 2018’s 2 percent rise. System sales jumped 11 percent in China, which accounts for 27 percent of KFC’s total mix. In the U.S.—17 percent—system sales bumped 2 percent. CEO Greg Creed also called out Japan and Indonesia, which reported double-digit comps at 15 and 12 percent, respectively.

But focusing on the U.S., a couple of themes emerged. KFC’s value through abundance drove transactions, Creed said. The company’s introduction of a la carte menu items, like the 2 for $3 Chicken Littles, allowed customers to build their own meals. KFC then followed with new options in its $5 Fill Up and $20 Family Meal Offerings.

The latter note plays into another sales driver gaining traction across KFC’s U.S. business. YUM! invested in two major operational levers—new menuboard designs and delivery through Grubhub, which the company holds a $200 million stake in.

There are currently 2,200 KFCs offering delivery and 3,200 units available for click-and-collect on the Grubhub marketplace. Creed said a nationwide launch is coming later this year.

KFC has seen early success, he added, due to it strength in the dinner daypart, which is where delivery tends to over-index in most markets. “I always jokingly said, I think the Colonel 60 years ago invested the bucket realizing that one day we’d be delivery it, because it’s the perfect delivery vehicle,” Creed said.

KFC has seen heavy orders around dinner, big packs, and bone-in chicken.

In-store, KFC closed out Q1 with more than 1,500 “American Showman” designs in the U.S. The package is known for its red color blocking, barn-like materials, heritage accents, and test elements, like an open “kitchen theater,” retail stores, and delivery call-outs. KFC remodeled 65 units in the period as it strives for positive net unit growth in the U.S.

Taco Bell

Taco Bell is testing a vegetarian menu, with hopes of a national rollout.

More on Grubhub

YUM! celebrated the one-year anniversary of its deal with Grubhub this past February. At the time, nearly half of its 45,000 restaurants already offered pickup and delivery via online ordering. Yet the U.S. market was one it could serve better. Grubhub instantly made KFC and Taco Bell more accessible to customers, the company said.

Taco Bell just launched nationwide delivery through the third-party platform in early February. It’s now live in more than 4,000 U.S. locations and “opportunistic market expansion should increase restaurant coverage over time,” Creed said.

While too early to provide specific data, he said traffic and check benefitted from the launch. It’s allowed for real-time feedback and learnings. One thing YUM! did, why it took a year to ignite the launch, was integrate Taco Bell’s point-of-sale system directly into the Grubhub app, which means pickup is timed to the moment. Delivery is available on Taco Bell’s site, where guests plug in their zip code and are directed to Grubhub. They can also just go to Grubhub’s site or app.

Additionally, click-and-collect functionality is available on Taco Bell’s site and app, while YUM! expects the functionally through Grubhub to arrive soon. “Having launched with marketing support in February franchisees are all in on this major initiative and are very excited about delivery as an opportunity to drive incremental sales and transactions,” Creed said.

Taco Bell turned in another strong quarter, although it wasn’t quite as robust as the last few. The chain’s same-store sales of 4 percent were its slowest in three quarters. Taco Bell did, however, enjoy stellar comps of 5 percent in the U.S. Unlike KFC, that’s where the chain makes its impact—6,611 of its 7,105 units are stateside. In Q1, 50 restaurants opened while 27 closed.

Pizza Hut

Pizza Hut continues to shift its business to more off-premises friendly locations.

Perhaps the more surprising Grubhub development in the quarter came with Pizza Hut.

Over the past couple of years, YUM! has worked to update the assets of its 18,466-unit pizza brand, especially in the U.S., where there are 7,473 venues. The main target being getting the real estate to match sales trends—moving more stores to the delivery and take-out focused Delco model over Red Roof locations. Currently, 90 percent of Pizza Hut’s business is off-premises.

Part of this, Gibbs said, is using the Grubhub partnership as an additional channel. At Q1’s end, more than 200 Pizza Huts were on the Grubhub marketplace. While customers place the orders on Grubhub’s website, Pizza Hut’s drivers still deliver the product.

Gibbs said YUM! is encouraged by early results because there are different customers on Grubhub versus those who frequent Pizza Hut’s traditional ordering avenues. This lets YUM! access new business through Grubhub’s platform.

Creed said the brand is working on delivery fundamentals, like better temperatures and faster delivery times. In the U.S., Pizza Hut improved its percentage of orders delivered in less than 30 minutes by 3 percentage points, year-over-year, in Q1, Gibbs said.

Creed also commented on the rise of aggregators and how that affects business. “There’s obviously a negative impact,” he said, “but it’s hard to measure what the cannibalization effect is of aggregators on Pizza Hut, on the pizza category.”

Pizza Hut continued to lag Taco Bell and KFC on the top-line. Same-store sales were flat in the U.S. and system sales declined 1 percent due to a net new unit decline of 1 percent. Pizza Hut closed more U.S. stores (56) than it opened in Q1 (47). Globally the brand debuted 172 restaurants and closed 160. This system movement was expected, YUM! said, as Pizza Hut reworks its asset base in favor of off-premises models.

Creed said Pizza Hut is refining its message as well, and leading with value, like the $7.99 large two-topping deal and its $5 Lineup. The latter provides a pipeline for future innovation as Pizza Hut drops new news into the category.

“As we've continued to reiterate for both the U.S. and the international businesses, sustainable improvements in sales growth will remain a slow build as we update and reposition the asset base and make the messaging more distinctive,” he said.