Each quarter marks another step in Yum! Brand’s ultimate goal of shifting Pizza Hut from dine-in to off-premises, and Q3 was to the tune of 632 closures globally.
Of those 632 shutterings, 422 closed in the U.S. and 210 shut down internationally. It surpasses the previous two quarters combined, which saw 573 global closures (278 U.S. and 295 internationally).
Year-to-date, 1,205 units have closed across the world, offset by 345 openings. The chain now has 17,842 units total, down from 18,532 at this point in 2019.
On average in the U.S., the AUV of the closed units were about two-thirds of the overall system average. The mix of dine-in units lowered from 38 percent to 36 percent in Q3.
CFO Chris Turner listed several factors at play in Pizza Hut’s movement toward a “healthier global estate off of which to grow.”
The first relates to the brand’s largest U.S. franchisee, NPC International, which filed bankruptcy in July and agreed to close up to 300 units—half of which were underperforming dine-in and Express locations. He noted that the process is largely complete and baked into the final unit count for Q3. The second factor harkens back to Yum!’s Q4 2018 call when the brand anticipated closing between 100 and 150 units due to overlap following the Telepizza alliance. Six overlap shutterings occurred in 2019 and 47 have happened so far this year.
Thirdly, COVID dislocations have disrupted the development of off-premises units. Turner’s final point was that while the pandemic has quickened the process, there is still some distance between Pizza Hut and its preferred footprint.
“We do think the brand is well-positioned for the future based on these accelerating trends,” CEO David Gibbs said Thursday during the brand’s Q3 earnings call. “Franchisees are obviously benefitting from that in terms of their financial condition and the opportunity to execute the strategy we’ve talked about now for a couple of years about wanting to get out of certain dine-in assets that aren’t brand building assets that are essentially holding us back … Certainly it’s a brand with a bright future in our portfolio, but still has a lot of work to do to pivot the asset base to the asset base that makes sense for today’s consumer.”
As Turner explained, Pizza Hut has the capability to capitalize on changes in consumer preference. For example, the off-premises channel in the U.S. increased 21 percent when excluding closed Express units. If those Express stores are included, the channel generated a 17 percent increase. Systemwide, the upward movement was in the mid-teens.
Globally, the pizza brand saw same-store sales lower by 3 percent due to rising U.S. stores offset by a drag internationally. Domestic Pizza Hut restaurant comps increased 6 percent in Q3 and have grown 1 percent year-to-date. International locations, which are more dependent on dine-in sales, experienced same-store sales declines of 9 percent in Q3. Year-to-date, the drop is 14 percent. In the quarter, revenue increased to $243 million, a one percent bump year-over-year.
THE COVID-19 ROAD FOR YUM! SO FAR:
Yum! Brands, and What It Takes to Hire in COVID Times
How Yum! Beat the COVID Odds, and Got Better Because of it
Yum!'s Digital Business Has Gained Over $1 Billion (latest quarterly report)
Taco Bell to Trim Menu Nationwide on August 13
KFC's Plant-Based Chicken is Headed to Southern California
Yum! Unveils $100 Million Plan to Combat Inequality
1,200-Unit Pizza Hut Franchisee NPC Declares Bankruptcy
Yum! Sales Gain Momentum, Set New Heights
Taco Bell to Hire 30,000 People in Coming Months
KFC to Provide $500,000 Worth of Groceries to Employees
At One Point During COVID-19, Yum! Had 11,000 Closed Restaurants
Taco Bell Wants to Become the Safest Place to Eat
Yum! Brands Has 7,000 Restaurants Closed Globally
For Yum!, same-store sales dropped 2 percent, but total revenue grew 8 percent to $1.4 billion. More than 35,000 restaurants globally now offer delivery, which is an 11 percent rise year-over-year. Digital remained consistent at 30 percent of sales, up from 19 percent in 2019. In the quarter, digital sales reached a single-quarter record of $4 billion, or a $1 billion increase from Q3 2019. Additionally, the company returned to year-over-year core operating profit growth at 7 percent.
Roughly 1,000 units are temporarily closed, meaning 98 percent of the system is open. Geographically, Pizza Hut stores in the U.S., Latin America, Asia, and India make up the majority of the closures. Excluding those closed units, Yum!’s same-store sales are roughly flat.
Net unit growth increased 2 percent, but Gibbs said it’s a matter of when, not if, for Yum! to return to 4 percent or higher because of promising macros, real estate tailwinds, and growth-minded franchises. Yum! Currently has 50,126 stores globally—17,743 domestically and 32,383 internationally.
“I’d love to say we’ll get there as soon as we can,” Gibbs said. “Our teams are going to be striving to do even more. But we’re confident in the long run. We still have uncertainty about the timing of it. That’s why we can’t commit to the exact timing of when we get back to that algorithm.”
Taco Bell was a bright spot for Yum!, with comps lifting 3 percent globally. Total revenue rose to $501 million, or a 2 percent uptick. Taco Bell’s positive movement was driven in part by innovation, including the debut of the Grilled Cheese Burrito, which now mixes at 9 percent. That was followed by the $5 Grande Nachos Box and the $1 Nacho Crunch Double Stack Taco.
The chain’s growth was also aided by an efficient drive-thru involving 30 million more cars and a 17-second reduction in average wait times. Breakfast—which is at more than 50 percent of stores—is mixing 4 percent, a dip from 6 percent prior to COVID. But Gibbs assured that Taco Bell is committed to the daypart long-term and that it will eventually return to all stores.
Taco Bell has 6,798 units domestically and 7,400 worldwide.
Looking toward the future, the company unveiled its Go Mobile asset design in the U.S. that will come with a smaller footprint and emphasis of digital and off-premises. The stores will have mobile pickup lanes and bellhops for outside in-person ordering.
“I think Taco Bell always had their finger on the pulse of the consumer,” Gibbs said. “That’s what makes the brand great—the way they connect with consumers. They’ve recognized that we’re really in an environment where food is going from something as fuel to being something a little more like entertainment. This is an environment where people are now comfortable with how things are going to be for a while, and they’re looking for a little bit more excitement.”
Yum!’s largest brand, KFC, witnessed a 4 percent slide in global comps, largely due to pressures surrounding international locations. U.S. same-store sales increased 9 percent in Q3, and 5 percent year-to-date, compared to a 7 percent decrease for international stores in the quarter, and 14 percent decline year-to-date. KFC has 3,995 U.S. locations and 20,607 internationally.
Revenue lowered to $586 million, or a 4 percent decline from 2019. Domestically, the drive-thru lifted roughly 60 percent year-over-year. Eighty percent of U.S. KFC locations now offer delivery, as well.
Same-store sales at the recently acquired Habit Burger Grill slipped 3 percent in Q3. Pre-COVID, dine-in accounted for more than 50 percent of sales, but amid COVID, the chain maintained a 40 percent digital mix in Q3. Gibbs said refranchising interest is “extremely high,” but Yum! plans to be careful with the approach and timing as it refines the off-premises aspects of the model and picks “cornerstone partners” to start the process. The Habit finished Q3 with 282 stores globally, 274 of which are in the U.S.