Yum! Brands CEO David Gibbs described Taco Bell's growth formula as "magic," but the subsequent results are very much real.
The brand was recently named one of Time Magazine's Most Influential Companies of 2023. The chain also successfully took down the "Taco Tuesday" trademark after filing a petition and launching a global campaign in 19 markets with NBA superstar LeBron James. Engagement in one week surpassed the entirety of last year's highly anticipated relaunch of the Mexican Pizza.
That level of external recognition and marketing impact was made possible by Taco Bell's tech innovation. Its digital channel increased almost 35 percent year-over-year, thanks to in-store kiosks now deployed in 100 percent of restaurants. In terms of operations, thousands of Taco Bells are using recommended ordering, which predicts and recommends the quantity of each product a restaurant general manager should order. Additionally, the brand is leading the rollout of Yum!'s Next-Generation Cloud First POS System—an innovation that improves operational efficiencies and enhances employee productivity. It was launched in 1,000 shops in the second quarter and should be in roughly 5,000 units by the end of 2023.
"This 'category of one' brand remains ever relevant by pushing boundaries and introducing and reintroducing exciting and craveable menu items and always being part of the cultural moment and conversation," Gibbs said during Yum!'s Q2 earnings call.
Taco Bell's same-store sales rose 4 percent in the second quarter, fueled by an expansion of hours and growth in the breakfast and late-night dayparts. The chain's $5 Cravings Box and Deluxe Build Your Own Cravings Box provided a strong value proposition and maintained company-operated margins of 25.6 percent in the quarter.
"Taco Bell's ability to deliver such strong margin performance, despite mid-single-digit inflation, once again demonstrates the power and resilience of their business model and preserves their compelling unit economics, which remain near an all-time high," said CFO Chris Turner.
Gibbs said the majority of Yum!'s U.S. operating profit is driven by Taco Bell.
The company is now on Yum!'s proprietary commerce platform for web, mobile, and delivery transactions. The long-term goal is to quickly implement campaigns in multiple geographies or brands without having to build integrations with different technologies across the business. KFC, the first chain to join the commerce platform, launched a limited-time partnership with a video game company and was able to build infrastructure for the promotion in a matter of weeks. Beforehand, Turner said the process would've taken months with significant third-party expenses.
"In addition, you've got robust capabilities at the base and you build tailored front-ends that are relevant to each market and brand on top," Turner said. "So at the end of the day, we're driving profitable growth for our franchisees and for us through this strategy. Franchisees obviously benefit from that and they share in the investments that we make through our digital fees that we have in certain markets. But at the end of the day, if this is an ROI-driving move for both our franchisees and for us."
Taco Bell's development is on pace for a record year. Globally, the company opened 63 gross new stores in the second quarter—36 in the U.S. and 27 in international markets across eight countries. Taco Bell finished Q2 with 7,241 domestic and 1,079 international restaurants.
Starting January 1, the business will be run by Sean Tresvant, who was named division CEO in late June. He joined the chain in January 2022 as global chief brand officer. Previously, he spent more than 15 years in leadership roles at Nike, including CMO of the Jordan Brand. Tresvant will replace Mark King, who has led Taco Bell since 2019.
"Very few companies have that kind of talent in place to just step in and we know we won't miss a beat and [Tresvant will] take the business to a higher level of Taco Bell," Gibbs said.
Companywide, Yum! reported another quarter of double-digit digital growth that resulted in $7 billion in sales. That represented more than 45 percent of global system sales in the second quarter. Kiosks are in more than 60 percent of stores and bring in 10 percent higher average checks compared to front-counter sales.
To further advance its digital strategy, Yum! is using a new customer data platform solution to give a unified view of guests across U.S. brands and third-party aggregators.
"This will enable us to improve digital experiences for our customers and ultimately increase customer frequency," Turner said. "Eventually, this and other internal programs will provide the infrastructure to unlock personalized marketing, joint branding, and future automation. This is the latest step in our vision to one day achieve 100 percent of sales powered by digital."
KFC is Yum!'s largest digital business on a dollar basis and showed year-over-year growth in sales and mix during the quarter. The chicken chain's U.S. same-store sales rose 5 percent, fueled by a combination of product innovation and value strategy. It had 3,913 U.S. and 24,587 international stores at the end of Q2.
Pizza Hut's U.S. comps lifted 1 percent with help from the chain's Melts platform. The category giant will become part of Yum!'s commerce platform later in 2023. Pizza Hut had 6,570 U.S. and 12,672 international locations by the completion of Q2.
The Habit Burger Grill saw flat same-store sales in the quarter. The fast casual's company-owned margins improved to 11 percent by leveraging Yum!'s purchasing scale and raising labor productivity. Turner said continued investment in the long-term growth of the chain will result in a small operating loss in 2023. The Habit Burger finished Q2 with 351 U.S. restaurants and 12 international units.
Although there have been national discussions around a recession, Turner is confident in Yum!'s ability to operate in the upcoming conditions.
"We're still growing our share in the industry, at the same time, we're navigating a little bit more challenging environment in those emerging markets," Turner said. "But when you add it all up, we've proven to demonstrate how resilient our brands are and how we can operate really in any environment and win."