FROM OUR COLUMNISTS
TACO BELL SHOWS IT’S GOOD TO HAVE SKIN IN THE GAME The Bottom Line: The Mexican fast-food chain is the best-performing part of parent company Yum Brands’ business. It’s also the one with the most company stores. That’s not a coincidence.
BY JONATHAN MAZE
as Manhas put it, which gives the company more credibility with its franchisee base. Generally speaking, brand ownership in and of itself does not dictate whether a com- pany is successful or not. That largely goes down to management decisions. There are plenty of examples of all-franchised compa- nies doing well and more than plenty of ex- amples of all-corporate stores doing poorly. But over the years we’ve come down on the side that more store ownership is better, because having a good number of stores gives franchisors a better sense of the profitability of those units so they can focus on that. Taco Bell needs those restaurants to make money because parent Yum Brands’ U.S. profits de - pend on it. That’s a powerful incentive. Yet, as legacy brands’ profitability strug - gles, investors and owners push refranchis - ing. Selling franchise rights is more profita - ble as a percentage of revenue than is store operations, though store operations generate more dollar profit. That tends to divorce brands from the day-to-day challenges of store operations. And there’s less incentive for brands to im - prove profitability, because they don’t make their money that way. They instead make their money off revenue. But that profitability is key for brands to be able to accomplish what they want. Taco Bell franchisees, in this case, are some of the country’s most innovative and successful op - erators. They pay high prices (10x EBITDA, or earnings before interest, taxes, depreci- ation and amortization in some cases). And they do things like build Cantina restaurants and double-decker restaurants with eleva - tors that deliver food in the drive-thru. And all that helps generate sales growth, which helps the franchise. And the best way for legacy franchisors to understand that profitability is to own more restaurants.
TACO BELL’S PROFITABLE FRANCHISEES HAVE BUILT STORES SUCH AS THIS TWO- STORY “DEFY” LOCATION. PHOTO COURTESY OF TACO BELL
T aco Bell on Tuesday said that its same-store sales this quarter are expected to increase 8%, which if it happens would be a remarkably strong performance compared to the balance of the fast-food sector at the moment. As I noted here, it also would continue a strong run of sales growth. The chain has reported just two quarters of negative same- store sales since 2011, and one of those was during the worst part of the pandemic. As Yum CEO David Gibbs noted Tues - day—and just about every other time he talks about the company’s results—Taco Bell is one of the company’s “twin growth engines,” along with KFC international. The chain ac- counts for 80% of Yum’s U.S. profits. There is one caveat to that. Taco Bell op - erates a lot more of its own locations than does either KFC or Pizza Hut. In reality, Gibbs said, “it’s more like 50-50,” factoring out those company locations. At the end of 2023, for instance, Taco Bell operated 483 company locations, or 6.5% of its 7,400 locations at the time. By comparison, KFC operated 46 compa- ny locations, or 1.2% of its U.S. units. Pizza Hut operates just seven restaurants, or 0.1%.
It makes some sense for Taco Bell to op- erate more of its own restaurants than either Pizza Hut or KFC. Taco Bell’s company res- taurant profit margins were 24.3% last year. Restaurant chains tend to prefer restaurant operations when those operations generate a healthy profit. When they don’t make a healthy profit they sell to franchisees and focus on the far-more-profitable business of selling franchise rights. “I think it really demonstrates our con- fidence in the model,” Taco Bell CFO Neil Manhas said on Tuesday. At the same time, it’s also difficult to look at those numbers and wonder whether Yum’s other brands would be better off with more corporate stores and not fewer. Both KFC and Pizza Hut have struggled in the U.S. off and on for years, and neither have the profitability that Taco Bell has. If a brand having store ownership means it has “confidence in the model,” then what does it say when brands own fewer restau- rants? By operating more of its own locations, Taco Bell can test ideas and get a sense of what works and what doesn’t. And it means the company has “skin in the game,”
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