Taco Bell Tops Yum Portfolio After Tough Year

'Value-Oriented' Chain Rises Through Recession as More Seek Cheap Eats

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CHICAGO (AdAge.com) -- It was only a year ago that Taco Bell's same-store sales fell sharply following an E. coli outbreak in the Northeast and a rat infestation in a New York City unit. But now, analysts are citing Taco Bell as the star in the Yum Brands portfolio, and this month David Novak, CEO of the parent company, called the chain the "best-positioned U.S. brand" to navigate the current macroeconomic environment.
David Novak, CEO of Yum Brands
David Novak, CEO of Yum Brands

"Last year we had a tough year for some obvious reasons, with the food-safety issue that we had," Mr. Novak said. But the chain's reputation for value, a raft of new products and a flood of consumers looking for cheaper eats (the chain is introducing a menu of products priced as low as 79¢) has once-troubled Taco Bell on the upswing. Yum's KFC and Pizza Hut brands skew more toward dinner and therefore have higher check averages. Those restaurants have been hurt more by the recession.

During the first quarter, UBS analyst David Palmer called Taco Bell "the horse that drove" same-store-sales gains for the entire portfolio. Yum same-store sales increased 3% in the quarter, and Taco Bell now accounts for about 50% of the company's profits, Lehman Brothers analyst Jeffrey Bernstein said in a report.

"We continue to believe Taco Bell to be the strongest [brand in the Yum portfolio], with their most recent challenges self-inflicted," Mr. Bernstein said. "The brand has a number of initiatives on tap in the near term to drive improving sales trends, with their new value menu the most substantial driver."

Taco Bell will introduce a "Why pay more?" menu this week with 11 items priced below $1. Mr. Novak said the products were tested in three major markets before getting the go-ahead.

Smoothies, low-fat items
"The brand is value," he said. "And in this environment, there's no one that can really top what we have to offer. I would look at this as -- the 'Why pay more?' -- as us taking a proactive measure to strengthen our already-No. 1 value position."

The chain is also rolling out Fruitista Freeze, a line of fruit smoothies expected to be incremental to sales. In January, the chain launched a lighter line of products called Fresco. Its nine menu items have fewer than nine grams of fat.

Mr. Novak said the chain will be using "layers" of advertising to drive trial for the array of new offerings. "We really went after this very hard," he said. "We did a lot of consumer testing, concept testing, and we did market testing. And we would not expand a national value initiative [if] we didn't have the sense that it was going to grow sales transactions and profits vs. the control situation."

Darren Tristano, exec VP of Technomic, said Taco Bell has weathered some hardships in the past year but was bound to bounce back at some point. According to Technomic's research, Taco Bell enjoys the unusual position of having consumers equally distributed across income categories and age groups, as well as a 50-50 split between the sexes. He added that the chain's value proposition is especially attractive in a recession.

Forced to trade down
"Taco Bell has always been very value-oriented," he said. "The 99¢ menu has helped, but because performance has been down in the past few years, you can look at it and say it's resurgent. But at some point it was expected it would perform better, so they're making up some lost ground."

Mr. Tristano added that Taco Bell was hurt by the ascendance of Mexican fast-casual concepts such as Chipotle, Baja Fresh and Rubio's. But the trend has reversed for two reasons, he said. First, the tightening economy has forced consumers to trade down to lower-price restaurants, and stiffer competition has forced Taco Bell to step up its game.

"Fast casual -- as better-quality, fast-casual Mexican [restaurants] have grown -- has forced Taco Bell to remodel stores, raise the bar on quality of food and quality of experience inside the four walls of their restaurants," he said. "They've gotten better at doing what they do, and the economy has shifted their customer base more toward them."

Wait, What Are We Selling Again?

Taco Bell might be the darling of the Yum Brands portfolio, but its counterparts are facing identity crises. Both Pizza Hut and KFC are undertaking menu expansions that stray from their core positioning.
Chicken's new address: Pizza Hut's Wing Street has received a strong reception from consumers.
Chicken's new address: Pizza Hut's Wing Street has received a strong reception from consumers.

Pizza Hut has begun selling pasta and is ramping up the nationwide rollout of its Wing Street brand of chicken wings. KFC, meanwhile, is still in the chicken business but will add some of the grilled variety, including grilled chicken on the bone, by next year.

As part of its introduction of the Tuscani line of baked pasta products last month, Pizza Hut rebranded itself as Pasta Hut as an April Fool's Day gag. Lisken Lawler, director of concept development at Pizza Hut, said the company sold 2 million pans of pasta in the first month.

Ms. Lawler said the company's research found that consumers eat pasta seven to eight times a month and are looking for easier ways to get dinner on the table. And while many people eat pizza and pasta together, Pizza Hut figures the new products give it a shot at incremental sales.

Staying moist
While delivery pasta might sound like a meal that has "watery" written all over it, Tuscani Brand Manager Doug Willmarth emphasized that the meaty marinara and chicken Alfredo are baked dishes. "When you order pasta from a restaurant to go, by the time you get home, it's soggy, in my experience," he said. "These have been engineered to deliver. We make sure it has great moisture content and tastes really great."

Pizza Hut's first Wing Street opened five years ago, and its strong reception -- and the surprising number of consumers who like eating wings and pizza together -- has led Yum to open more locations. The chain will begin national advertising for Wing Street, calling itself the nation's largest wing chain, next year.

The chain with the bigger chicken heritage, KFC, will begin offering a variety of grilled items in 2009, a strategy that hasn't always worked for it in the past. Yum CEO David Novak recently described grilled chicken as the "centerpiece" of the chain's much-needed turnaround. KFC has introduced more-healthful grilled and rotisserie products in the past but pulled them when sales didn't pass muster.

However, adding grilled chicken to the menu gives KFC a play in the all-important better-for-you game. UBS analyst David Palmer said it's the first step the chain needs to take in order to get incremental visits and enter the "broader usage category."

Pizza Hut Pasta Line Gets Cooking With Practical Joke

Pizza Hut introduced its line of pastas with hidden cameras, a hip restaurant and a number of unwitting New Yorkers. Its commercial gives the impression that big-city folk arrive at a fancy restaurant for a nice meal and are punked by a down-home delivery chain.
Pizza Hut said the only actors in this Tuscani ad were the wait staff.
Pizza Hut said the only actors in this Tuscani ad were the wait staff.

It's sort of true.

Pizza Hut and its creative agency, Omnicom Group's BBDO, New York, commandeered Provence, a French restaurant in the West Village, for an evening in February. As part of the joke, Pizza Hut hung a "Tuscani" sign (after its new pasta line) where the usual shingle would be. The restaurant was also "closed for a private event," and guests were recruited by invitation from the neighborhood and surrounding area. Casual passersby were turned away.

The 50 invited guests were given a choice between the two Tuscani pastas, meaty marinara or creamy chicken Alfredo. Everyone got Pizza Hut's breadsticks and a simple dinner salad with vinaigrette dressing.

Pizza Hut spokesman Chris Fuller said the only actors were the wait staff. At the end of the meal, Provence's head chef came out from the kitchen and announced that Pizza Hut had delivered dinner.

The reactions, he said, were real.

Mr. Fuller acknowledged similarities to the Folgers-crystals commercials from the early 1980s. "Looking at them, you can see a lot of parallels," he said, but the inspiration came from elsewhere.

"The idea came from our feedback from customers that they liked our pasta better than their favorite Italian restaurant," he said. "Some people said they would re-dish them at home and serve it as their own."
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