Taco Bell's Refocused Brand Should Deliver Mas Returns

Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yum! Brands (NYSE: YUM) is one of the world's largest fast food restaurant chains, with over 39,000 restaurants worldwide. Yum! earns the majority of its revenues through its three signature brands KFC, Pizza Hut, and Taco Bell.

After a rough stretch that saw controversies in both its growing China market and the U.S. over food quality, Yum! appears to be righting the ship. A refocusing of its brand strategy in Taco Bell should lead to shareholder returns. Here's how Taco Bell is helping shareholders Live Mas.

Branding: it matters!

A year ago, after questions about food quality and the "pink slime" fiasco, Taco Bell was ready to change some minds. Take into effect that parent company Yum! was facing quality concerns in its super growth Chinese market, and the whole company wanted to change minds. But, despite some fanfare from high profile investor David Einhorn, the ill-fated Taco Bell "Cantina Bell" was the wrong approach.

Cantina Bell, through its celebrity spokesperson Chef Lorena Garcia, aimed to convince customers that Taco Bell was going to compete with Chipotle (NYSE: CMG) on quality. That's like saying Oasis was going to compete with the Beatles on melody. As Chipotle Founder Steve Ells put it best, consumers don't seek "quality" grilled chicken from restaurants that don't have: "knives, grills, or a cutting board."

Besides being a bit of a joke, the Cantina Bell concept was dangerous because it signaled that Taco Bell was losing its focus. You don't build a brand for decades that's based off of cheap, quick, Mexican food and change it overnight; which is precisely why Taco Bell's expansion of its Doritos Locos taco (via the cool ranch version) is such a good sign.

Doritos Locos is Spanish for profits

Taco Bell has learned that it doesn't need to choose between the past or its future. By shoring up concerns about food quality while debuting new products that fit its brand, Taco Bell is choosing the best of both.

The results have been impressive and immediate. Taco Bell sold over 300 million of the original Doritos Locos taco in eight short months last year.

In addition to being right in the wheelhouse of Taco Bell's brand the Doritos Locos line could have operational benefits for Yum!'s shareholders. PepsiCo (NYSE: PEP) is the parent company of Doritos and has a longstanding relationship with Yum! as its beverage supplier.

When you think about it, the Doritos brand provides many opportunities for Pepsi and Yum! to scratch each other’s backs. If the new Cool Ranch tacos sell anything like the originals (over a million a day) even more products could be in the pipeline. The new Doritos brand chips with the Doritos Locos flavors could just the start. That's not only good for Pepsi's sales; it's good for Taco Bell as the chips will increase exposure. Further, the more product lines that Yum! can purchase from one vendor (PEP), the cheaper each unit costs. Simply put, it's better to get soft drinks and shells from Pepsi, than it is to buy them from separate vendors.

In any language: Taco Bell matters

Whether you agree with my positive "border" sentiment or not, Yum! shareholders should be aware of just how much Taco Bell matters to their bottom line.

1. With nearly 6,000 units Taco Bell is responsible for nearly a third of Yum!'s business.

2. But, almost all of Taco Bell's units are in the U.S.--there's tremendous growth potential abroad.

3. Most importantly, Taco Bell has no major competitors in its space. So if the Bell gets it right; there is tremendous opportunity for pricing power.

In fact, if you want an example of this pricing power just compare Taco Bell to fast food Super Giant McDonald's (NYSE: MCD). Over the past few years McDonald's saw tremendous growth through new product offerings like wraps, coffee, and smoothies. So, what did McDonald's largest competitors do?

Well, with its "exciting things" offering this year, Burger King (NYSE: BKW) debuted (you guessed it) wraps, coffee, and smoothies. Now, ask yourself this: would Chipotle ever offer a Doritos flavored Taco?

Chipotle would be nuts to do that, and therein lies the opportunity for Yum!'s shareholders.

Every successful move that McDonald's makes is subject to "copycat" moves from Burger King, Wendy's, and others. McDonald's is a great company, but if Taco Bell is really "back" the pricing edge goes to Yum! given its lack of true competitors.

A spicy brand moat

The restaurant business is notoriously fierce for two reasons: 1). rabid competition and 2). low margins. Burger King and McDonald's are locked into a restaurant version of the "cola wars" right now, and with Cantina Bell, Taco Bell is begging to join them.

Cantina Bell throws Yum! into an unnecessary competition with Chipotle that they can't win. They'd be better off selling Big Mac's.

So what should Taco Bell do if it doesn't want to chase a stronger competitor’s coat tails (like Burger King is doing)? How can they avoid competition, and protect margins?

Brand identity is the answer. Doritos Locos offers hope. Rather than competing with Chipotle, it shows that Taco Bell is learning from Chipotle. Like Chipotle, it lets Taco Bell: 1). energize their fan base and 2). protect margins by offering something other mega-chains can't.

Here's the bottom line. If Taco Bell continues to push the Doritos line effectively, Yum! Brands (along with Chipotle) will deserve one more thing that McDonald's and Burger King don't. 

A spot in your portfolio.

Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and PepsiCo. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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