Should Yum! Brands Worry About The Rise of Chick-fil-A?

Yum! Brands' (NYSE: YUM) KFC fast-food restaurants have been a sore spot for the company over the past few years. The chain's sales in China, once considered a pillar of growth, faded due to avian flu outbreaks and a brand-tarnishing scandal involving expired meat. That decline, along with pressure from activist investors, convinced Yum! to plan a future spin-off

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Unfortunately, things aren't looking much better for Colonel Sanders back at home. A report from QSR Magazine last August revealed that KFC had fallen out of the top ten fast food chains in America for 2014.It also generated 27% less domestic revenue than Chick-fil-A, which ranked 8th overall and became the most popular fried chicken chain in the country.

To make matters worse, privately held Chick-fil-A generated more than triple the average sales of KFC per restaurant, with less than half as many franchised and company-owned locations. Chick-fil-A also closes every Sunday, while most KFC locations are open seven days a week.

Why is Chick-fil-A crushing KFC?

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Chick-fil-A constantly receives high marks in terms of its food and customer service. Consumer Reports repeatedly ranked Chick-fil-A as one of the top chains in terms of "solicitous, prompt, and accurate service" while KFC and fellow Yum! chains Taco Bell and Pizza Hut failedto make the cut.

The American Customer Satisfaction Index's Annual Restaurant Survey from last year alsoranked Chick-fil-A as America's favorite restaurant in terms of food, restaurant layout, cleanliness, and overall satisfaction. Chick-fil-A reportedly only accepts 0.4% of all franchise applications it receives each year to ensure that franchisees provide customers with a consistent dining experience.

Chick-fil-A's new Manhattan location. Image source: Chick-fil-A.

By comparison, KFC frequently resorted to marketing gimmicks and outrageous menu items to generate attention. After founder Harland Sanders passed away in 1980, KFC stopped using his likeness and the brand's red-and-white stripes in its marketing campaigns, and made new ads targeting younger customers.

In the 1990s, KFC introduced a cartoon Colonel and renamed the chain from Kentucky Fried Chicken to "KFC" to highlight its other menu items. KFC then launched new menu items like popcorn chicken and the disastrous Double Down "meat sandwich." Meanwhile, rumors of KFC using genetically modified "Franken-chickens" persisted, resulting in poor public comparisons to Chick-fil-A -- which was notably the first U.S restaurant to start serving antibiotic-free chicken in 2014.

How KFC plans to fight back

Nearly a quarter of KFC's revenue (excluding China) came from the U.S. market in 2015. During the year, systemwide sales in the U.S. rose just 2%, underperforming KFC's global (excluding China) constant currency sales growth of 7%. KFC's sales in the U.S. and Canada were also notably lower than any other geographic region.

KFC is fighting back against Chick-fil-A and other rivals with a new marketing and reinvention campaign, dubbed the "Re-Colonelization," which includes bringing back Colonel Harland Sanders as the company's mascot, remodeling stores, and retraining employees to ensure higher customer satisfaction.

It's similar to what Starbucks founder Howard Schultz did when hereturned as CEO in 2008. Schultz dumped the company'smisguided attempts to sell stuffed animals, CDs, and other gifts, its book, music, andmovie promotion deals, and temporarily closed stores to retrain employees to make better coffee. More importantly, Schultz focused on expanding Starbucks' presence in new markets like China.Schultz's new strategies worked wonders, and Starbucks stock has soared 500% since his return.

But Chick-fil-A isn't KFC's only headache

Bringing back the Colonel and retraining employees might be a step in the right direction, but QSR's numbers indicate that KFC has a long way to go before it can win over Chick-fil-A customers.

Yum investors should also note that Chick-fil-A isn't KFC's only problem. Americans' love for fast food is fading, and healthier, bistro-like quick serve chains like Panera Bread are gaining market share. According to QSR, Panera generates about 2.6 times more sales per location than KFC. New chicken wing challengers like Wingstop (NASDAQ: WING) -- which posted 16% sales growth and 4.6% comps growth last quarter -- could also cause more headaches for KFC.

Should Yum investors be concerned?

KFC is only one of Yum!'s three core brands, and the U.S. only represents about a fourth of its overall sales. Therefore, investors shouldn't panic about the rising popularity of Chick-fil-A yet. But if KFC's new marketing and reinvention push falls flat, Chick-fil-A could shatter the Colonel's chances of becoming an American fast food icon again.

The article Should Yum! Brands Worry About The Rise of Chick-fil-A?

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