When you think about it, the Doritos brand provides many opportunities for Pepsi and Yum! to scratch each other’s backs. If the new Cool Ranch tacos sell anything like the originals (over a million a day) even more products could be in the pipeline. The new Doritos brand chips with the Doritos Locos flavors could just the start. That’s not only good for Pepsi’s sales; it’s good for Taco Bell as the chips will increase exposure. Further, the more product lines that Yum! can purchase from one vendor PepsiCo, Inc. (NYSE:PEP), the cheaper each unit costs. Simply put, it’s better to get soft drinks and shells from Pepsi, than it is to buy them from separate vendors.
In any language: Taco Bell matters
Whether you agree with my positive “border” sentiment or not, Yum! shareholders should be aware of just how much Taco Bell matters to their bottom line.
1. With nearly 6,000 units Taco Bell is responsible for nearly a third of Yum!’s business.
2. But, almost all of Taco Bell’s units are in the U.S.–there’s tremendous growth potential abroad.
3. Most importantly, Taco Bell has no major competitors in its space. So if the Bell gets it right; there is tremendous opportunity for pricing power.
In fact, if you want an example of this pricing power just compare Taco Bell to fast food Super Giant McDonald’s Corporation (NYSE:MCD). Over the past few years McDonald’s saw tremendous growth through new product offerings like wraps, coffee, and smoothies. So, what did McDonald’s largest competitors do?
Well, with its “exciting things” offering this year, Burger King Worldwide Inc (NYSE:BKW) debuted (you guessed it) wraps, coffee, and smoothies. Now, ask yourself this: would Chipotle Mexican Grill, Inc. (NYSE:CMG) ever offer a Doritos flavored Taco?
Chipotle Mexican Grill, Inc. (NYSE:CMG) would be nuts to do that, and therein lies the opportunity for Yum!’s shareholders.
Every successful move that McDonald’s makes is subject to “copycat” moves from Burger King, Wendy’s, and others. McDonald’s is a great company, but if Taco Bell is really “back” the pricing edge goes to Yum! given its lack of true competitors.
A spicy brand moat
The restaurant business is notoriously fierce for two reasons: 1). rabid competition and 2). low margins. Burger King and McDonald’s are locked into a restaurant version of the “cola wars” right now, and with Cantina Bell, Taco Bell is begging to join them.
Cantina Bell throws Yum! into an unnecessary competition with Chipotle Mexican Grill, Inc. (NYSE:CMG) that they can’t win. They’d be better off selling Big Mac’s.
So what should Taco Bell do if it doesn’t want to chase a stronger competitor’s coat tails (like Burger King is doing)? How can they avoid competition, and protect margins?
Brand identity is the answer. Doritos Locos offers hope. Rather than competing with Chipotle, it shows that Taco Bell is learning from Chipotle. Like Chipotle Mexican Grill, Inc. (NYSE:CMG), it lets Taco Bell: 1). energize their fan base and 2). protect margins by offering something other mega-chains can’t.
Here’s the bottom line. If Taco Bell continues to push the Doritos line effectively, Yum! Brands (along with Chipotle) will deserve one more thing that McDonald’s and Burger King don’t.
A spot in your portfolio.
The article Taco Bell’s Refocused Brand Should Deliver Mas Returns originally appeared on Fool.com is written by Adem Tahiri.
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