Taco Bell Owners Push Back on Yum Hardball Tactics

IRVINE, Calf. – Yum Brands Inc. (NYSE: YUM) has been demonstrating its insatiable appetite for China’s market in past years, and that  craving is now reflected in the company’s year’s first quarter results.  Yum announced that China’s same-store sales were up 13% showing a drastic gain over McDonald's 6.5% rise in that country, while its domestic performance has been negative.

The franchisor of major brands KFC, Pizza Hut, Taco Bell, A&W and Long John Silver’s is now predicting that the second quarter will be the low point for the year, adding that the worst is yet to come. In a recent Wall Street Journal MarketWatch article, Chief Financial Officer Richard Carucci explained that they have not yet been able to reverse the negative sales trends at Taco Bell, which he feels is key to their improvement in the U.S.

After Yum Brands announced the decline of first quarter results, CEO David Novak was quick to put much of the blame on a “bogus” lawsuit that was filed earlier this year, challenging the quality of Taco Bell’s beef.  Although the lawsuit has now been dropped, company officials said they were surprised by the extent of the negative impact it had on the chain’s sales.

Last Tuesday, the New York Post reported that Taco Bell is considering filing a lawsuit against the law firm that brought the bogus suit alleging the taco chain was using filler in its meat. The franchisor has also launched an advertising campaign asking Florida-based Beasley, Allen, Crow, Methvin, Portis & Miles PC to apologize for its claims.

Some insiders feel Yum Brands problems run much deeper than the damaging effects of an unfair lawsuit. One source said Yum is advancing its growth in China at the expense of its struggling domestic fast food restaurants. He asks, “Has Yum lost touch with the American consumer? Is it so wedded to old ideas that the marketplace has moved beyond them?”

The franchisee community seems to agree. 

Last month, Taco Bell’s Franchise Management Advisory Council (FRANMAC) sent an urgent email to restaurant owners, encouraging them to participate in a Town Hall Call to have their voices heard. The franchise organization’s mission is to “support, represent, and lead the Taco Bell franchise community and to serve as equal partner to Taco Bell Corp.” The letter gave 14 bullet points on concerns that the board had taken up on the franchisees behalf. FRANMAC president Tom Cook stated: “I ask that you support these positions and be vocal. We will not make progress unless we are heard with one common voice.” 

Among the issues, Cook’s email explained that the council had voted to look into countersuing the plaintiff lawyers in Alabama for challenging Taco Bell on its alleged lack of beef in its ingredients, and to form a “Beef Litigation Exploration Committee.” The members of the committee were to have met last Thursday.

The 14 issues stated in the email are as follows:

1. Until such time that sales return to 2010 levels plus an additional amount to adjust for 2011 commodities, allowable impact should be reduced to 5%, and all mandates should be delayed.

2.  A core responsibility of our advertising agency is to produce creative that effectively promotes our menu.  Ads in the past 12 to 18 months have been largely ineffective and we believe that an agency review should take place.  Taco Bell Corporate, in conjunction with FRANMAC should immediately undertake an agency review.  Without a doubt, we will learn new things, obtain fresh ideas, and be further ahead, even if we decide to stay with the incumbent agency.

3.  We have either a real or perceived quality problem at Taco Bell.  Until such time that we reinvigorate our base business, we should redeploy the resources that are utilized on HMR, Oasis, and Breakfast to focus on our quality perception and fixing our core.

4.  The value proposition as currently being executed is not driving transactions, and squeezing margins beyond a reasonable tolerance. 

5.  There is a lack of balance between QV/AV/PV on our calendar.

6.  The Kronos [a workforce management solutions] Contract continues to have clauses that are different for company restaurants versus franchise restaurants.  Additionally, the company has a unilateral ability to change the contract after we sign.  That is far from your promise of fairness and transparency.  Why would you negotiate a lopsided contract.

7.  The Xpient Software is not complete, not integrated with Sabretooth and Prism, and does not allow for franchisee central file maintenance.

8.  We do not understand the unwillingness to allow DMA's to run the Beef Quality spot while senior management says we just have to wait until we start running value again.  The business will turn around then.  Well, it didn't.  Now what?

9.  Why is there an unwillingness to find a third vendor for broadband?

10. All mandates must have an adequate return on investment.

11. There continues to be an ongoing lack of alignment around the Refresh program.

12. Franchisees believe that TBC has reacted very slowly on the West Coast vs. Balance of Country situation.

13. There has been a lack of PR efforts in light of the recent Beef Lawsuit.

14. We believe there is a need to cut 20-25% out of the cost of a new building to make the economic model work.

The Taco Bell franchisee association has not been the only group to express its dissatisfaction with Yum Brands mandates. FRANMAC’s stance mimics a similar position adopted a few weeks ago by the Association of Kentucky Fried Franchisees (AKFCF) on franchise policy, according to one unnamed source. 

Although Pizza Hut’s franchisee association has remained quiet thus far, the other two franchisee organizations are pushing back against Yum’s hardball tactics, which one source says has now reached “Syrian” proportions. He said the largest single issue is Yum’s continued pressure on franchisees to perform "extremely costly facility remodels” that the franchisor knows are unproductive. “There should be a moratorium; instead, Yum is using its facility remodel obligations in bad faith to try to extort other concessions from franchisees,” he stated.

In an attempt to find out what resulted in the Taco Bell Town Hall Call, Blue MauMau contacted FRANMAC. Phone calls and emails were not returned.  

Related Articles:

• Yum struggles to fix US sales drops as China gains
• Beef Lawsuit against Taco Bell Withdrawn
• Taco Bell Considering Lawsuit of Its Own
• When Is Beef Really Beef at Taco Bell?
• Yum! Brands Will Offer to Buy All Outstanding Shares of Little ...
• Yum Brands Plans to Sell Long John Silver's, A&W as It Focuses on ...
• Taco Bell:Would It Kill You to Say You’re Sorry?