The U.S. economy is starting to see brighter days and seems to be recovering from the harsh times it faced during the COVID-19 pandemic.
The U.S. gross domestic product (GDP) increased at an annual rate of 2.8% in the third quarter of 2024, mainly due to the contribution of consumer spending, which saw a rise in goods and services.
💰💸 Don’t miss the move: SIGN UP for TheStreet’s FREE Daily newsletter 💰💸
Although the economy seems to be doing much better, and consumers are reportedly spending more on the food service industry, they remain value-conscious about how they're spending their hard-earned money.
Related: Chipotle makes changes to end portion scandal
Many restaurants and fast-food chains have acknowledged this trend by offering value meals and deals. However, some restaurants are still struggling to figure out how best to connect with cost-conscious consumers.
Yum! Brands/Taco Bell
Taco Bell enjoys fast-food sales strength
On November 5, Yum! Brands (YUM) , the parent company to KFC, Taco Bell, Pizza Hut, and Habit Burger & Grill, released its third-quarter earnings for 2024.
The company reported earnings per share of $1.37, down from $1.46 at the same time last year and below analysts' expectations of $1.41.
Yum! Brands' revenues were $1.83 billion, which also fell short of analysts' expectations of $1.90 billion.
Related: Dr Pepper makes bold move to claim energy drink crown
Although revenue increased by 7% compared to the same quarter last year, growth was uneven. Same-store sales, or sales at restaurants open over one year, fell by 2% because of lackluster performance at KFC and Pizza Hut. Their same-store sales declined by 4%.
In short, Taco Bell single-handedly carried Yum! Brands quarter. Its same-store sales increased by 4%, partly due to value-centered strategies like the launch of its $7 Luxe Cravings box.
"Taco Bell's competitive advantages in innovation, value leadership at compelling price points, and strong consumer connection are clear reasons why the brand remains a category of one when it comes to winning with consumers in any economic environment," said Yum Brands CEO David W. Gibbs during the third quarter earnings call.
Taco Bell offers deals Pizza Hut and KFC don't have
Although Taco Bell, Pizza Hut, and KFC are all owned by Yum! Brands, their business models are completely different.
Taco Bell has become so successful due to its compelling price points, which adapt to any economic environment. Its prices range from $1 to $11, and its value deals provide customers with more food for less money.
Despite having a lower price point than most fast-food chains, Taco Bell continues to focus on innovation. This year alone, it launched a collaboration with Cheez-Its, added the Cheesy Street Chalupas to its menu, delivered value with its $7 Luxe cravings box, and began heavily promoting its breakfast items.
More Retail:
- Shein partners with a popular children's clothing brand
- Coca-Cola brings back nostalgic Mexican soft drink
- Starbucks makes a major move many coffee drinkers will love
On the other hand, Pizza Hut and KFC have higher price points than Taco Bell, with Pizza Hut's ranging from $7 to over $37 for a single item and KFC's beginning at $5 with its value menu offering and going all the way up to over $40 with its family meals.
In the quarter, Pizza Hut and KFC didn't focus on value or innovation as much; rather, they began shifting toward lower price points in certain countries to comply with customers' demands.
Another advantage Taco Bell has over its weaker sister brands is that it doesn't span as many countries. It only has locations in the U.S., Canada, Europe, and Australia, which allowed it to remain unaffected by the conflicts in the Middle East.
Pizza Hut and KFC are found almost everywhere, making them more vulnerable to global conflicts. KFC covers over 155 counties and territories, and Pizza Hut covers over 110, both of which have multiple locations in the Middle East.
Yum! Brands highlights some problems
Yum! Brands is optimistic about the company's growth but still has some concerns about the current conflicts in the Middle East, which contributed to declines in Pizza Hut and KFC due to the multiple store closures in the region.
"The risk of an increase in closures of lower volume units affected by the Middle East conflict could impact our Q4 net new unit growth and put at risk our ability to deliver our 5% unit growth target. Given the lower volume nature of these units, we would not expect a material financial impact from their closure," said Gibbs.
For the next quarter, Yum! Brands expects operating profit to grow in the mid-to-high-single digits, with Taco Bell's company-operated store margins to be between 23% and 24%.
Although Yum! Brands didn't provide an update for Pizza Hut and KFC, it will provide a more in-depth outlook for 2025 in the next quarter.
Related: Veteran fund manager sees world of pain coming for stocks
