You’ll recall that this spring when Motley Fool was running frantic headlines such as, “Look Out McDonald’s, Here Comes Taco Bell With Its Breakfast Menu,” BurgerBusiness.com was talking sense. I wrote that Yum! Brands CEO David Novak’s proclamation that “we’re in to win at breakfast” was a bit of sleight of hand because he was predicting only $100,000 in per-store incremental sales or about 7 percent of sales at breakfast. With victory defined so modestly (breakfast’s share is at least double that at every burger chain that sells breakfast), Taco Bell couldn’t help but “win.” But it sure wasn’t going to spell doom for the Arches.
McDonald’s Corp. reports its Q2 sales next week and even if they’re not pretty, Taco Bell shouldn’t claim victory. But it did, of course, just as predicted. Yesterday, Yum’s Novak called March 27, the day Taco Bell began selling breakfast, “a day that will go down in history.” That’s enough swagger to make you lose your breakfast, but there’s more.
“A day that will go down in history” Yum’s CEO calls it.
For Q2, Taco Bell reported a 2 percent gain in same-store sales—below the Consensus Metrix number of +3.6 percent —and a 1 percent gain in units. Most analysts called the numbers disappointing. Novak said they smelled like victory in the morning. “Our breakfast day part mix [is] around 7 percent of sales in the second quarter. We fully expect breakfast to be incremental and [bring] anywhere from $70,000 to $120,000 per unit in annualized sales,” Novak told analysts during a conference call. He added, “And for the long term there is no question we’ve enhanced our brand position as the choice of the new generation.” OK, but that new generation can turn on you faster than you can say “selfie.” He must have forgotten that many Millennials and others abandoned Taco Bell after the much-publicized lawsuit in 2011 questioning how much meat was in its tacos.
OK, so breakfast is a hit, Novak has declared. “Now the big question you’re probably asking is this: Given the success of the breakfast launch, why did same store-sales increase only 2 percent in the quarter?” he asked. And he had an answer ready: “Keep in mind that during the first two months of the quarter, our immediate emphasis was almost totally on breakfast. Once we returned to advertising our core business, it was with Cool Ranch Spicy Doritos Locos Tacos chicken. And frankly, this product underperformed versus our expectation.”
In other words, it spent so much time and money promoting breakfast—which won’t account for more than 7 percent of sales, compared with 25 percent of sales for McDonald’s—that sales for its more-important core menu suffered. But when it did promote the core menu, their highly touted taco loco-doco LTO didn’t sell so well. If McDonald’s CEO Don Thompson offered that kind of convoluted explanation, Wall Street pundits and Motley Fool snarkers would be all over him. But that’s Novak’s explanation for Taco Bell’s underperformance.
“Our franchisees are in breakfast to win,” Novak said once again yesterday, adding that “they have been cheering us on to broaden our breakfast offerings with new products that we had already in the pipeline.” So they want new products that Taco Bell already had in development. That’s good. And Taco Bell also will be innovating with its core menu to drive business and will introduce mobile ordering, Novak said.
I’ll stand by what I said in April: Taco Bell’s breakfast will be a success because the chain has set the success bar so low. But McDonald’s, Burger King, Carl’s Jr., Jack in the Box and other QSRs don’t have to “look out” or panic. They’ll all be fine.