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Yum! Brands CEO: the whole world is opening up to KFC

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Yum! Brands CEO David Gibbs joins Yahoo Finance Live to discuss the company's earnings, the labor shortage, and the impact of supply chain issues.

Video Transcript

[ELECTRONIC BEEPING]

BRIAN SOZZI: Yum! Brands is out with solid sales and earnings beats this morning. Despite the popularity of Taco Bell, especially at midnight after a few cold ones, it was actually KFC that led the way for Yum! Brands in the quarter. Joining us now is Yum! Brands CEO David Gibbs fresh off his earnings call. David, always nice to see you here.

Let's start on KFC because that was one of the most interesting things to me in the quarter, 7% unit growth. Where are you opening those KFC locations now? And why are you moving so aggressively?

DAVID GIBBS: Well, there's a lot of great news in KFC, Brian, and you zeroed in on one of the really exciting bits of news and the things that are going on at KFC. It is growing fast. Yum! China obviously reported last night. They talked about their KFC development in China. But we're seeing the rest of the world really starting to pick up development.

In Russia, for example, we opened close to 50 units for the quarter. It wasn't that long ago that we had just bought a 100-unit chain to convert it to KFC to enter the country. I remember that like it was yesterday. And yet we're building 50 units in the quarter now.

So we've got widespread development, actually, going on at KFC. And it's not just KFC when it comes to development at Yum!. We opened 760 units in the quarter. That would be a great number for a huge company like us for a year. We opened 760 in the quarter. All of our brands are growing all around the world.

BRIAN CHEUNG: Hey, David. Brian Cheung here. I want to ask about just labor costs right now. Your operating margin clocking at a 45.4, I believe it was, for the third quarter. Obviously, we've been hearing anecdotes about how difficult it is to find, keep, retain talent right now. How are you approaching wages for your employees in the United States or even globally as well because it seems to be a global story when it comes to that labor dynamic that we're seeing at play?

DAVID GIBBS: Yeah, certainly a more pronounced issue for us in the US, like everybody else that's been talking about the pressure on wages and labor. And as a reminder, the majority of our business is outside the US, where it's not nearly as much of an issue.

Since the day Yum! was formed, our formula has been to lean in on people and the culture at our restaurants. We've got 1 and 1/2 million people that work in Yum!'s restaurants around the world. Creating the right environment for them in the restaurants to thrive and invest in their development and growth, many of them go on from team member to franchisee, wildly successful.

So we were into culture before it was cool. People are talking about it a lot more now because it is really a differentiator in the restaurant. So we're more focused on retention, frankly, so that we don't have open jobs, than we are the difficult challenge of filling open jobs. And I think our franchise partners in the US are doing an amazing job in that regard.

The environment in our restaurants is one that you would want your kids to work in. They would have a great time. They'd learn some real skills. And it would lead them on any path they want from a career standpoint, given the growth that we have in our business.

BRIAN SOZZI: David, seeing this labor shortage really have different types of impacts at restaurant chains, some companies are cutting hours, others are seeing just longer wait times to the drive-thru. Well, if I go to Taco Bell at midnight after a few drinks, like I have been known to do throughout my existence on this Earth, I mean, are those times-- are you still open at noon? Are you having to cut back on your opening times because you just can't find workers to work?

DAVID GIBBS: Well, we appreciate your midnight business, Brian. And yes, if you go to Taco Bell late night, you will very consistently see that our restaurants are open late night. In fact, it's a little bit of an advantage for us right now that we do have a strong late night business. We always have had one. And some of the other competitors are actually pulling back on their hours late night, which is giving us an opportunity to grab some market share late night.

Now, the flip side is true. Our breakfast business at Taco Bell is not as well-developed. So we don't have all of our stores serving breakfast yet. That's where we've pulled back on a few hours. But we just relaunched breakfast in all of our stores last quarter at Taco Bell, made a significant investment in marketing dollars, and are on the path to get all of our stores reopened for breakfast over time.

BRIAN CHEUNG: I want to ask about M&A. So you had the acquisition of Dragon Tail Systems. It's that AI system that you're using to manage kitchen flow and the dispatching of delivery drivers. Obviously, logistics a major structural changing point during the pandemic. What's the significance of Dragon Tail Systems? And what do you hope that's going to provide for your brands?

DAVID GIBBS: Yeah, I'm glad you asked about that, Brian. We've been doing these kinds of acquisitions now for several years. We're in a very unique position at Yum!, the largest restaurant company in the world. We do business with all of these smaller companies all around the world. We get to see them in action.

And then when we see one that we think we can scale throughout our system, we can go ahead and buy it and get great economics on that because of our scale and the synergy we get by bringing it in-house. And this is really an advantage our franchisees have of being part of Yum!, as we can bring in this technology, make it a competitive advantage for us.

Dragon Tail in particular has some really proprietary AI-powered software that helps us sequence orders in the kitchen to make our restaurants much more efficient, sequence orders in terms of how we dispatch and deliver them, and a whole bunch of other proprietary IP that we're really excited about.

We already have Dragon Tail in 1,700 units. There's another 1,000 that are signed up. It started as a Pizza Hut support from a third party. It's now in-house, and KFC and our other brands will be signing up. And actually, a lot of other companies in the restaurant industry use them as well. So we've bought something that we think can be a huge competitive differentiator for us. And we're probably not done when it comes to M&A of tech solutions that give us a competitive advantage.

BRIAN SOZZI: I did a double take yesterday, David, on that golden arches earnings call. They took a menu price increase of 6% because of inflation. Have you had to take a similar increase because of the inflation you're seeing?

DAVID GIBBS: Certainly, during this time of inflation and labor and product pressures, we've taken some price increases, not to that degree. We think we do a better job than most of managing the supply chain. We have all of our brands purchased through a co-op in the US that we formed with our franchisees. It's staffed with an amazing group of professionals that really are leaders in the industry.

We've been able to navigate supply chain challenges. And our first look is to see if we can ring out some efficiencies to cover increased costs rather than pass them on to consumers. But we also know in the industry and in our business, we still provide an amazing combination of convenience and value in tasty food. And over time, everywhere around the world, when we have faced pressures, we've certainly been able to pass along some of the cost to consumers and still continue to thrive.

The best sign of how we're managing through this is that 760 net new units that we opened this quarter, that's franchisees investing their capital to build new stores because the unit economics are so strong. And that's, getting back to the point of your question, can we manage through this and how do we pass along some of the costs? Yes, enough to keep the unit-level economics where they are, which is great.

BRIAN SOZZI: And lastly, David, let me channel your competitive spirit here. Papa John's has made some good inroads into stuffed crust pizza. And I know Pizza Hut as the stuffed crust king. How do you plan to respond?

DAVID GIBBS: Well, I guess imitation is the sincerest form of flattery. And we know, as the industry leader in the restaurant business, as the innovator in the restaurant industry-- all of our brands are known for innovation and creating new product. There's always going to be people trying to imitate what we're doing.

But I think people can tell the difference between the original and an imitation. And that is what's driven our business 60-plus years, on average, for all of our brands, a history of innovating and appealing to consumers' needs. And I have no doubt we will continue to lead in that space, no matter what everybody else tries to copy from us.

BRIAN SOZZI: Sounds like fighting words to me. Yum! Brands CEO David Gibbs, always good to see you. We'll talk to you soon.