Yum Needs More than a Doritos Flavored Taco
Chase is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yum's (NYSE: YUM) Taco Bell is known for experimenting. The crunchwrap supreme, the double decker, the black jack taco … the list goes on. So when the Doritos taco launched in early March, there was general intrigue, but most just saw it as yet another step on the way to ultimately ending up in Taco Town ridiculousness. The snickering ended pretty abruptly upon the release of sales numbers.
One hundred million Doritos Locos Tacos were sold in the first ten weeks after their launch, making it the most successful launch in the company's history. This contributed to a 13% increase in same store sales at Taco Bell and an overall 7% increase in Yum US. The only problem with focusing on a product launch, though, is whether or not this is a sustainable product. Are customers trying the Doritos taco just to try it? Or are they intent on making this a part of their restaurant rotation (that is the five or so you choose from on a weekly basis)? I think the novelty factor is pretty huge here, but future sales figures will have to be seen for this to be determined.
If the US division of Yum is depending on the novelty factor of a single product, where can they find healthy growth? The Cantina Bell menu, a fully developed, sustainable and healthy line of products eerily similar to Chipotle (NYSE: CMG), has pretty much spent any buzz it was going to generate. So there goes that. The only market in which Yum can truly be excited about developing serious growth is China, where KFC dominates. Only problem is that might be slipping: Q2 2012 operating profit at Yum China fell by 4%. Before you go driving off the cliff, keep in mind that this was on a 27% increase in system-wide sales growth (same store sales growth of 10%). Yum attributes the fail to food and labor inflation in China, which is no surprise, and something that Yum figures is short-lived.
We know that labor and food inflation was enough to cause a pretty serious surprise at Yum. So who else could be affected? Though McDonald's (NYSE: MCD) is nowhere near as dependent on China as Yum (23% of revenue from Asia Pacific/Middle East/Australia), they are growing their position. As described in their Q2, released July 23, "The Company-operated margin percent for the quarter and year decreased as positive comparable sales were more than offset by higher labor, commodity and occupancy costs. Acceleration of new restaurant openings in China also negatively impacted the margin percent for the quarter and year."
It is important to remember China is still an emerging market, and it behaves as such. McDonald's wasn't burned too badly by China this time (though they were burned by other things), but this is a factor to pay attention to when considering a buy.
TheLaowai has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, and Yum! Brands. 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. If you have questions about this post or the Fool’s blog network, click here for information.