Small is better for Yum Brands restaurants, CEO says

The new Pizza Hut restaurant design focuses more on delivery and carry-out than dine-in business. | Courtesy of Pizza Hut

Bigger isn’t always best, according to the Yum Brands CEO Greg Creed.

During a call with analysts Thursday morning, Creed said that the restaurant giant was making changes at its brands — KFC, Pizza Hut and Taco Bell — to focus more on drive-through, carry-out and delivery. That includes downsizing Pizza Hut and Taco Bell stores.

Yum Brands recently offered an incentive to Pizza Hut franchisees to encourage them to change more quickly from the traditional red roof design to the new “delco,” or delivery carry-out, model. The new design focuses more on the experience outside the restaurant building and eliminates some wasted seating inside the store, but to do that, franchisees may have to build a new store from the ground up or find a new location.

“We know we have the best product in the category when we deliver it hot and fresh,” David Gibbs, chief financial officer at Yum Brands, said of Pizza Hut. “We are doubling down on that,” with hiring more delivery drivers.

Yum Brands is investing $130 million in Pizza Hut in an effort to turn the brand around following years of poor sales. Pizza Hut reported a same-store sales decline once again in the second quarter of this year; sales at stores open at least a year dropped 1 percent.

Executives also noted that smaller, urban Taco Bells would allow them to expand into new locations that they couldn’t previously. The company opened a new version of the fast-food store called Taco Bell Cantina in Chicago’s Wicker Park in 2015 and has slowly been expanding into more urban areas.

“Urbanizing the brand will help drive net new units,” Creed said, adding that Taco Bell has opened a 400-square-foot store in Brazil, and the smaller footprint enables the brand to move into cities on the continent of Africa.

By going smaller, the Taco Bell brand “can get bigger,” he said.

Taco Bell’s same-store sales rose 4 percent during the second quarter of 2017.

There are no plans to change KFC store designs currently — at least none that Yum Brands executives made known. However, KFC employees from around global will visit KFC China later this year to learn how they do delivery.

Delivery is big business in China, and Yum Brands leaders are hoping delivery will boost sales at KFC in other countries including the United States. KFC already makes up half of Yum Brands’ operating profit, Creed said.

KFC’s same-store sales during the second quarter were up 3 percent.

He previously said he wants to offer delivery at Taco Bell stores as well, but for it to take off, the company must figure out how to package Taco Bell food so it retains its quality from the store to the customer’s door.

“We are all in on delivery,” Creed said.

Gibbs noted during the call that new store development is a top priority for Yum Brands, which is currently about 94 percent franchised. It is expected to be 96 percent in 2018.

“The mission in this company has been to hammer home our focus on development,” Gibbs said. “It takes time to plant a development pipeline and expect it to grow.”

Following its earnings announcement, Yum Brands stock declined this morning. As of 11:05 a.m., the stock was down 1.55 percent to $75.44.