Yum! CEO David Gibbs is excited by what his brands just accomplished in the first quarter, and how could he not be?
KFC, Taco Bell, Pizza Hut, and The Habit Burger Grill combined to earn more than $5 billion in digital sales—a new record. Each of those restaurants set fresh highs in weekly sales per restaurant at least once in the quarter, and U.S. same-store sales soared 10 percent on a two-year basis. On the development front, Yum! opened 435 net new units, its highest quarterly total in several years.
The trajectory is more than promising, but Gibbs knows there’s more work to do. The next benchmark awaits.
“What you saw in Q1 just demonstrates the resilience of the business—how we’re coming out of the pandemic in a lot of markets that are now getting to the other side of this stronger with a better foundation to grow, evidenced by the development progress we made in the quarter,” Gibbs said Wednesday during the company’s earnings call.
“But we all know this is a journey,” Gibbs continued. “We all know we haven’t reached the finish line. We’re not doing a victory dance, but we are very excited about the future.”
THE COVID-19 ROAD FOR YUM! SO FAR:
In terms of progress, Pizza Hut may be the best example. In Q1, the chain opened 71 net new units after shedding a net of more than 200 stores in Q4 2020 and closing a net of nearly 500 stores in Q3 2020. U.S. same-store sales lifted 8 percent on a two-year basis, including the impact of roughly 3 percent of stores being temporarily closed.
The off-premises channel generated 23 percent comps growth, a figure that strongly supports the chain’s shift toward off-premises only formats. Those results were driven by value with the $10 Tastemaker pizza, the launch of Detroit-style pizza, and the reboot of stuffed-crust pizza. The brand finished Q1 with 17,710 units worldwide.
“There’s still more work to do, and there will be choppiness related to the uncertainty of COVID and our continuing transition to a more modern estate,” CFO Chris Turner said. “But we are encouraged by strong unit economics in many markets, and our resilient global franchise base.”
Gibbs said the ability of franchisees to get out of low-performing stores has strengthened their condition “in a very big way.” That in turn sets up operators for much better growth going forward. A significant part of that is Flynn Restaurant Group’s acquisition of 937 Pizza Hut stores out of NPC International’s bankruptcy.
Flynn is now the largest Pizza Hut franchisee in the U.S., and Gibbs is confident in the company’s ability to effect change.
“Greg Flynn and his organization taking over a good chunk of the Pizza Hut U.S. stores is a huge positive for the brand,” Gibbs said. “They’re great restaurant operators. Great businessman that has a great team underneath him and knows how to run restaurants as well as anybody in this country. Very excited about the impact he will have taking over those stores and improving their operations and fixing up the assets and growing the business.”
For KFC, much of its optimism comes from the KFC Chicken Sandwich, which is performing at twice the volume of previous sandwich launches. It rolled out to select markets in January and reached all U.S. locations by the end of February. The new item is made with a quarter-pound, all-white meat, double-breaded, “Extra Crispy” chicken breast filet and is served on a freshly toasted buttery brioche bun, topped with crispier, thicker pickles, and “the perfect amount of the Colonel’s real mayo or spicy sauce.”
All early indications show the sandwich is highly incremental, and customers are coming back more frequently because of it. The demand for the KFC Chicken Sandwich has been so strong, that Yum!’s main challenge is keeping up with the demand as domestic chicken supply continues to tighten.
“That has been a very successful launch with a great product,” Gibbs said. “It really is a winning product in the category, and we’re excited about the impact that’ll have along with Secret Recipe Fries that rolled out in the quarter.”
KFC’s U.S. comps increased 11 percent on a two-year basis, with less than one percent of stores temporarily closed. The chain finished Q1 with 25,292 units worldwide.
Globally, digital mixed at a record 43 percent, driven by expansion of delivery, click and collect, and new channel ordering options. KFC’s drive-thru speed in the U.S. improved by nearly 15 seconds year-over-year, and the company also deployed a pickup and ordering solution across all domestic restaurants, including the launch of its first custom-built app.
Taco Bell is raising its digital game, as well. During Q1, the chain launched its first digital-led product—a $5 Build Your Own Cravings Box, offered exclusively on the app and website. Gibbs said the innovative item drove a meaningful increase in loyalty membership during the quarter. At the beginning of Q2, Taco Bell took another leap by opening its first digital-only store in Times Square, which features 10 kiosks and 15 pickup cubbies.
The chain’s same-store sales increased 10 percent on a two-year basis. In addition, domestic stores achieved their fastest average drive-thru speed in eight years, while serving 17 million more cars quarter-over-quarter. One-third of those orders were digital, which comes with a higher average check. Taco Bell finished Q1 with 7,493 stores worldwide.
“We’re coming out of 2020 with a great loyalty program and a lot of loyalty members. That progress was made last year as we increased our digital sales,” Gibbs said. “That lays the foundation for more success going forward. We did the first digital-only promotion of the $5 Create Your Own Box—it’s a great example of how having that digital business increasing gives us new tools to grow sales. I think the brand is hitting on all cylinders.”
The Habit Burger, Yum!’s newest brand, saw same-store sales grow 3 percent on a two-year basis, with roughly two percent of stores still temporarily closed. It’s a major improvement for the burger chain, which experienced a comps decline of 5 percent in Q4 2020. The company said sales growth has been aided by reduced government restrictions and the injection of stimulus checks. Digital sales are still mixing above 40 percent even as dine-in sales rose throughout the quarter.
The first quarter also witnessed the acquisition of two key technology companies—Kvantum, a leading consumer insights and data analytics company, and Tictuk Technologies, a solution that allows customers to complete orders through social media and chat channels, including WhatsApp, Facebook Messenger, Telegram, SMS, QR codes, and email.
Yum! believes both purchases are high-return acquisitions and will create a distinct competitive advantage.
“They’re not designed to drive a profit for Yum! We want to provide them at the lowest cost to our franchisees,” Gibbs said. “The return for Yum! comes through top line growth in our franchised units, which leads to more royalty income. We think we really have a great model here where we do these smaller acquisitions, but we can scale them across the world. They have almost no impact on our P&L initially, and then the return comes from growing sales and units and improving franchise economics, which we all know is a virtuous cycle, which leads to more development and healthier franchisees.”
Yum!’s systemwide sales increased 11 percent year-over-year, and core operating profit grew 33 percent. The company saw 1 percent unit growth in Q1, including a 4 percent increase at KFC, a 1 percent increase at Taco Bell, and a 4 percent decline at Pizza Hut. Turner said the company is confident that it can reach 4 percent annual unit growth “sooner rather than later.” In 2021, Yum! is optimistic that it will accomplish at least 3 percent unit growth.