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Yum Brands plans to copycat McDonald's

After a year of disappointing results, Yum Brands Inc. is looking to copy one of its biggest rivals in the fast food industry in a bid to turn around the troubled business.
/ Source: The Associated Press

After a year of disappointing results in its U.S. division, Yum Brands Inc. is looking to copy one of its biggest rivals in the fast food industry in a bid to turn the troubled business around.

At a meeting with investors and analysts Wednesday, Yum Chief Executive David Novak said the chain would introduce new products, including beverages and breakfast meals, expand its value menus and offer healthier options at all three of its main U.S. brands — KFC, Taco Bell and Pizza Hut.

Novak said the U.S. division’s transformation is being modeled after moves made in the past few years at McDonald’s Inc., which added healthy options, better quality food and beverage choices to its menu. The changes there led to far higher sales and profit at the nation’s No. 1 hamburger chain in the past year.

Novak said those techniques, particularly menu variety and healthier offerings, have already proved successful in its mainland China division — the main driver of its growth in the past year. At KFC restaurants in China, for example, the company offers fish products and are testing a line of beef items. In the U.S., the chain mainly sells fried chicken.

Novak said, given the success of those products and the sales strength of its China locations, the company would also look to that segment as a model for how to improve the U.S. business.

“We know this works,” Novak said. “We’re going to build a business we’re proud of. We can do a lot better. Frankly, we’re mad as hell that we haven’t done better.”

The company has struggled to recover from two highly publicized incidents at Taco Bell, once the leader of Yum’s U.S. business.

An E. coli outbreak that sickened 70 people last year and a rat infestation in a New York City KFC/Taco Bell restaurant that was filmed by a TV news camera in February both hurt the chain’s image, leading to lower traffic and sales numbers.

The chain is now projecting its same-store sales, or sales at stores open at least a year, in the division will drop 3 percent during fiscal 2007. In 2005, in comparison, same-store sales grew 4 percent at its U.S. restaurants.

“This year has probably been the worst year we could have had in the U.S., knock on wood,” he said.

To brainstorm ideas for how to fix the division, Novak said restaurant managers all visited a McDonald’s location during a “McDonald’s day” to see for themselves what made that chain so successful.

He said the managers found that McDonald’s was taking advantage of its “day parts,” or the time of day when meals are usually eaten, and had expanded its menu to included different types of protein, like chicken, fish and meat, salads and beverages.

“They have a tremendous amount of variety in their menu,” he said.

Novak said Yum will try to emulate that variety by adding new products at its own chains, including pasta dishes at Pizza Hut, shakes at KFC and frozen drinks at Taco Bell. The chain is also expanding its breakfast menu at Taco Bell and advertising lunch offerings at KFC, which garners most of its sales from the dinner hours.

Novak said Yum will also work on adding more “healthy” options to its menus.

“The whole world loves to eat healthy,” he said. “We’re focused on making sure we go after that as a big driver of our U.S. business.”

At KFC, for example, Yum plans to offer a line of grilled pressed sandwiches in the upcoming year and is also testing new slow-grilled chicken using special ovens it plans to install in restaurants in 2009.

He said the chain will also advertise its “Fresco” healthier menu offerings at Taco Bell, which are served with a low fat pico de gallo sauce. Yum is also working on a “healthier pizza” to be launched in 2009.

Besides the changes in the U.S. business, the company also outlined its plans for growth in its international and mainland China divisions.

Novak said the company sees the potential to open 20,000 restaurants in mainland China.

Chief Financial Officer Rick Carucci said the chain will also look to expand in emerging markets such as India, Russia, Vietnam and Nigeria.

Carucci said the company now views its international division as its biggest growth opportunity. He noted that the company now operates 12,000 restaurants abroad, excluding China, but has the potential to operate 40,000 locations.

The company has a total of 35,300 restaurants worldwide.

Carucci added the chain plans to open Taco Bell restaurants in international markets, including Dubai, India, Spain and Japan. Currently, Taco Bell is mainly a U.S. brand, with only five franchised restaurants open in the Philippines and one test location in Mexico that opened in September.