KFC is a leader in traditional hand-breaded, bone-in Southern fried chicken with considerable brand equity around its Original Recipe seasoning (top selling menu option) & Extra Crispy option. The brand promise is to make "authentic" food, following the authentic Colonel's lead in making chicken “the hard way” and the chain benefits from a resurgence in demand for fried chicken which represents one of the industry's fastest growing menu items. A strong value strategy offers consumers price certainty for complete, "real" meals across a broad range of price points (including $5/$20 Fill-Ups) and the brand is contemporized with its "Taste of the South" flavor profiles and equipment upgrade which facilitates system-wide execution of higher-end options like the Crispy Colonel sandwich, pot pies & Famous Bowls. KFC enjoys marketing scale as the largest traditional bone-in player with 42% segment share and its advertising entertains with playful iterations of Colonel Sanders while the intro of cult-favorite foods (like Chicken & Waffles) keeps things fresh. Facilities are also receiving an upgrade consistent with its new brand image and 70% of the system should be updated to its new American Showman fast casual image by 2020. Having said all this, the brand's comp growth over the last couple of years has not been as robust as would be expected given all these improvements. Slow progress reflects the challenge of turning-around an older brand & system (KFC was essentially built out nationally in the 1980’s with 5,000+ locations) and Millennial oriented advertising (which is intended to grow another wave of customers) has been more successful in changing attitudes rather than buying habits. Older stores struggle in weaker markets while a sharp ramp-up in chicken PPI over the last 2 years has required the promotion of higher margin products that offer less value in an increasingly price oriented market. In conclusion, while KFC is making Southern fried chicken cool again with its holistic, 360 degree “re-Colonelization” concept upgrade, it must be mindful not to get too far out in front of its core customer base who maybe simply looking to feed their kids on the fly with something other than pizza or burgers.



Annual RR Databook


Pizza Hut

Pizza Hut benefits from substantial scale and strong brand equity as the 2nd largest national player in the $1B+ chain pizza segment by domestic system sales. The brand (historically distinguished by its Pan Pizzas, Stuffed Crust products & fun innovation) has suffered a 15.4% decline in domestic market share among $1B+ pizza chains over the last 10 years through 2017 with comp underperformance attributed to: bi-furcated dine-in/delivery system (with no marketing support for 40% of units that are dine-in); the brand's historical lack of everyday value in a very competitive price environment; delayed digital ordering initiatives; need for faster delivery speeds; increased competition from non-pizza delivery; and increased competition in the pan pizza category. The brand's current goal is to reposition towards a modern delivery concept with the help of its 2017 Transformation Agreement which included: (1) $130MM franchisor investment to: upgrade restaurant equipment; accelerate improvements in restaurant tech; enhance digital & eCommerce capabilities; and boost ad dollars; (2) franchisee agreement to: implement national price points through 2019; increase their contribution to national ad spend; and contribute towards tech investments (digital ready POS). Brand upgrade also includes the addition of extra cheese on its pizzas and plans to either close or convert 80% of existing dine-in units to its Delco or new fast casual dine-in formats. The brand’s marketing pivot towards a new NFL sponsorship (picking-up where Papa John's left-off) goes along with a new ad agency (the 5th in 10 years) and its notable that NFL ratings have been declining even though it remains one of the biggest marketing games in town. Value remains one of the most important aspects of the pizza business and while Pizza Hut has made progress with its $7.99 large 2-top online only deal (introduced March 2017) and a new $5 pick 2 platform (2 medium pizzas for $10), the chain may do well to establish a permanent pizza value offer that is accessible online and off-line alike. Also, the chain may have more work to do to create a better financial model for delivery in high wage states (this represents a concern for the entire industry). In conclusion, while Pizza Hut's sensible turnaround is built upon a return to basics (hot, affordable & convenient pizza) it is possible that sales would further benefit from a strong everyday value equation to go with a renewed emphasis on core competencies including pan, stuffed crust & innovation.


3Q:18 Same Store Sales



New Unit Investment

  • RR’s New Unit Investment Report provides average building cost estimate details (excluding land) and franchise fee summaries for 47 national restaurant chains.
  • Report Highlights: (1) the sales-to-investment ratio for $1B+ chains continues to trend down after peaking in 2013, driven by construction cost increases and a slight decline in new build AUV’s; (2) RR's New Build vs. Buy Ratio rose for the 2nd consecutive year as construction cost inflation increases appeal of acquiring existing stores while store-level acquisition multiples have been relatively flat; (3) franchisors stepped-up development incentives which include franchise fee reductions to improve new build economics; (4) increasing use of non-traditional building formats should help to improve future new build returns; and (5) 9 chains introduced new or tweaks to existing building designs.