As China Slows, Yum! Rebrands at Home


By Michael B. Lewis | The Motley Fool

January 14, 2013


For the last few years, the investment thesis behind Yum Brands (NYSE: YUM  ) for most people was international growth. We have all heard the rumors and seen photos of Chinese KFCs with lines going down the block. Though many more stores are slated to open in Asia, there is another part of Yum! that has quietly made substantial improvements in the past year. The culprit of many a teenage digestive nightmare, Taco Bell is positioning itself as a serious fast-food contender -- going up not only against its fellow drive-thrus, but even the premium market. Does Taco Bell hold future value for Yum!?


Te quieres Taco Bell?

I apologize for the cheap line above, but in the minds of many, Taco Bell is still one of those "don't go there" dining establishments unless you are in college or are interested in seeing how many different ways a taco can be folded and presented as a different dish. So it may be surprising that Taco Bell sales have been the most compelling part of Yum!'s business lately. The Chinese market has slowed down -- last week Yum! announced it was expecting a decline in certain year-over-year sales metrics. Meanwhile, Taco Bell's new menu efforts and repositioning seem to be mitigating the issues from China.


After years of net negative store openings in the United States, it looks like Taco Bell will, this year, become an increasing presence in our lives. This comes on the heels of the company's relatively substantial menu updates.


Weekend update

Sometime in the middle of last year, Taco Bell began to roll out two new menu changes. One was a partnership with Doritos called the Doritos Locos Taco. Of course, we all slapped our foreheads at this one -- why wouldn't you make a Taco Bell taco shell out of a giant Dorito; that's obviously delicious. The product has been a success.


The second menu change was more substantial and indicative of the company's trajectory. Around April of last year, the Cantina Bell menu began to show up on menus and on television. Curated by a celebrity chef, the new menu consists of products that seem aimed directly at premium fast-fooder Chipotle Mexican Grill (NYSE: CMG  ) . Many were skeptical that the products could compete with Chipotle, especially at a lower price point. But then, as seems to happen more and more often these days, a popular investor threw his weight behind Taco Bell's efforts.


At New York's Value Investing Congress last year, David Einhorn went public with his firm's short position in Chipotle. The fund's due diligence found, from a survey of 1,600 Chipotle customers, through various metrics, that Taco Bell is in fact an emerging competitor to Chipotle's burritos and bowls. Personally, I don't expect Taco Bell to take over too much market share from Chipotle in the near future, but it doesn't need to. The point is, T-Bell has found a path back to relevance, even if it's on the coattails of Chipotle.


In addition to the menu revamp earlier last year, Taco Bell is currently testing a new "$1 Cravings" menu. If this makes you think of McDonald's (NYSE: MCD  ) , that's because it directly targets the famed McD's dollar menu.


$1 on the path to success

For a while there, McDonald's shifted its focus from $1 items to an "Extra Value" menu, with items ranging up to $1.99. This ended up being support for the saying "The enemy of good is better." The Extra Value menu just wasn't showing the results that the dollar menu did, and now we are seeing a reversal, according to a Janney Capital Markets analyst.


Armed with a dollar menu complete with three new items, Taco Bell is pushing further back into the competition and taking on the big guns. A dollar for a Spicy Chicken Mini Quesadilla (health concerns aside) may be more appealing than a flimsy hamburger.


Led by the Doritos Locos tacos and the Cantina Bell menu, Taco Bell posted a great year and looks to be a value driver for Yum! going forward.



Taco Bell, and Yum! as a whole, will face higher ingredient prices in the coming year, just as McDonald's and Chipotle have. Coupled with the $1 Cravings menu, this could spell lower margins on the horizon. For Taco Bell, though, the ingredients do not have the same focus on sustainability and healthiness -- elements that are core to Chipotle's business. By not paying for premium ingredients, T-Bell might be able to save some pennies, even if it kills us.


A buy?