David Gibbs
Chief Executive Officer at Yum! Brands
Thank you, Matt, and good morning, everyone. Despite the complex consumer environment around the globe, our team managed to grow profits 3% year over year with the quarter bringing to light the real strengths of our twin growth engines: Taco Bell U.S., which meaningfully outperformed the industry on comp sales; and KFC International, which meaningfully outperformed on unit growth.
Although the U.S. QSR industry experienced negative traffic trends in Q3, Taco Bell U.S. posted an impressive 4% increase in same-store sales and led the industry in Q3 on value perception among all QSR users. Taco Bell delivered another quarter of significant market share gains driven by the execution of the brand's magic formula involving brand buzz, value, category entry points and digital engagement. Taco Bell's competitive advantages in innovation, value leadership at compelling price points and strong consumer connection are clear reasons why the brand remains a category of one when it comes to winning with consumers in any economic environment.
Our other twin growth engine, KFC International, delivered 9% year-over-year unit growth, an incredible result that led all major competitors and that reflects the underlying power of the brand and the confidence of our franchise partners in the future of our business. KFC International's development was diverse, spanning 64 countries. Furthermore, gross unit openings year to date are up nearly 150 units over last year. Building on this momentum, KFC is enhancing its core capabilities to ensure growth over the long term by establishing seven centers of excellence focused on restaurant design, customer insights, market planning, food innovation and more. These centers will drive operational and marketing excellence while leveraging the brand's scale, strengthening a competitive moat that has helped KFC grow successfully around the globe in 150 countries, an achievement that few global brands have ever accomplished.
It is no secret that the global macroeconomic environment remains complex. In many parts of the world, our brands are delivering outstanding growth and outperforming the competition. We continue to see strong sales growth in KFC regions such as Africa, Latin America and the Caribbean and parts of both Europe and Asia. In South Africa, where our KFC sales are up strongly, our teams have improved our value proposition, limiting recent price increases to 1% in comparison to nearly high-single digits in affected local competitors.
In some other geographies, our performance did not meet our expectations and our teams are working with our franchise partners to reestablish strong value offerings, all while safeguarding franchisee profitability. The complex consumer environment that exists in many markets around the globe has contributed to pronounced regional sales variations, which has caused our system sales growth to fall short of our long-term algorithm this year. The most pronounced regional headwinds continue to be in the Middle East, Indonesia and Malaysia, stemming from the impact of the Middle East Conflict. In these markets, KFC same-store sales declines have generally ranged between 15% and 45% throughout the year, including Q3.
We are fortunate that the vast majority of our restaurants are in the hands of highly-scaled and well-capitalized franchisees around the globe, including Americana, our largest partner in the Middle East, who can weather temporary headwinds like this over extended periods. However, in a few isolated cases, the scale and duration of these sales impacts are affecting the financial health of our less scaled or less well-capitalized partners, particularly those whose restaurants have been most heavily impacted by the Middle East conflict. We are working closely with those specific partners to help them navigate the challenges and implement tactical and strategic changes including pricing studies, introducing new value offerings and adjusting development schedules to improve profitability and position the business for healthy growth in the future.
As we mentioned on the second quarter earnings call, the same geopolitical pressures have grown over time to meaningfully, but less severely, impact certain markets beyond the Middle East, Malaysia and Indonesia. As an example, we have seen in the U.K, Australia and New Zealand that KFC same-store sales performance in certain individual stores has been significantly impacted. Importantly, these specific pressures have been location specific and not indicative of broader global trends. Specifically, our KFC markets excluding China that we believe were not materially impacted by the Middle East conflict reported an encouraging low-single-digit increase in same-store sales.
As we shift to the U.S., the overall QSR industry is navigating a complex consumer environment. Of course, our scale and digital capabilities are an even bigger advantage right now and our powerhouse Taco Bell business, which represents 75% of our U.S. profit, is thriving. While our Pizza Hut and KFC businesses are more challenged in this environment, we have fantastic leaders in place in these businesses who are working through revised strategies to create a step change in the results.
Overall, we achieved 5% unit growth year over year, an impressive outcome considering the obstacles faced by our teams. Closures have temporarily increased this year, primarily in markets dealing with impacts from the Middle East conflict and in China. Despite the strength in our gross unit openings in this tough environment, the risk of an increase in closures of lower volume units affected by the Middle East conflict could impact our Q4 net new unit growth and put at risk our ability to deliver our 5% unit growth target. Given the lower volume nature of these units, we would not expect a material financial impact from their closure. While 2024 unit growth will reflect a temporary reset on unit closures, we're encouraged at the pace of our gross unit openings that Chris will discuss in more depth, and as we look at our 2025 pipeline, see no change in pace behind our gross opening momentum, giving us confidence in the strong fundamentals of our brands.
Now, let me highlight our relevant, easy and distinctive brands, or RED for short, in more detail, followed by our unrivaled culture and talent and Good Growth strategy. I'll then turn it to Chris to provide further updates on our third quarter results, including our bold restaurant development, unmatched operating capabilities and balance sheet position and capital strategy.
Starting with the KFC division, which represents 50% of our divisional operating profit, system sales grew 1% as significant unit growth was offset by the aforementioned Middle East conflict impact and transaction softness in several regions navigating constrained consumer spending. Such challenges have led competitors to introduce incremental value offers, namely to capture low-ticket transactions in markets such as the U.K., France and India. The good news is that despite category headwinds, we are gaining or holding share in several of our largest international markets, as well as seeing positive transaction growth in markets like Mexico, Poland and Korea. We're also sustaining high system sales growth in larger regions like Africa and Latin America and the Caribbean, where we've benefited from product innovation and more stable consumer environments.
Helping KFC to remain agile has been the focus of its robust digital strategy. Digital mix, now over 55%, grew 3 percentage points over the previous quarter on expanding kiosk and click and collect channels. In the U.S., limited time offers underperformed expectations due to a more intense competitive environment, particularly within the chicken QSR category. In Q4, the team will focus on strengthening its value proposition and has recently introduced boneless innovation like Original Recipe chicken tenders. Additionally, the team will capitalize on the success of the KFC Rewards membership growth, which has contributed to digital sales growth over 20% from last year.
Moving on to Taco Bell, which contributes 37% of our divisional operating profit, system sales grew 5%, driven by a 4% increase in same-store sales. This quarter, Taco Bell gained momentum with the launch of the Cheesy Street Chalupas, marking the brand's first innovation on the Cantina Chicken platform. Further momentum came from the reintroduction of the Cheez-It and investing behind the $7 Lux Cravings box. The team tapped into Cheesy Street Chalupa innovation to drive delivery sales by offering exclusive access to an aggregator's premium members, which led to seven daily sales records for the aggregator during the quarter.
Toward the end of the quarter, the team made this strategic move to make breakfast optional for our franchise partners, providing greater flexibility to spend our marketing dollars more effectively on growth drivers such as Cantina Chicken and our Cravings Value Menu. These are platforms where our marketing spend has had significant success building new and very profitable sales layers. We expect the net impact from these changes to be less than a 1-point headwind to same-store sales growth. We intend to reintroduce breakfast in the future with a bolder, more distinctive Taco Bell approach.
In another strategic priority involving growth through its loyalty program, Taco Bell drove impressive advancements with 90-day active loyalty users increasing by 50% year over year. On the digital front, where Taco Bell U.S. has implemented the majority of Yum!'s digital and technology platforms, digital sales grew an amazing 30% year over year. Internationally, Taco Bell focused on executing its three core pillars, brand, food and value, leading to positive same-store sales growth for the quarter. Very encouragingly, that momentum has continued into Q4.
To strengthen brand relevance, the team is connecting more with local cultures including most recently in the U.K. with the launch of Encore Hours, allowing stores to stay open late near music venues to serve fans after shows. We were also pleased to see our first equity store open in the U.K. in late October with a very encouraging consumer response giving us confidence in our accelerated investment in the brand internationally. Clearly, Taco Bell International has the potential to be a third growth engine for Yum! for many years to come.
At Pizza Hut, which represents 13% of our divisional operating profit, system sales declined 1% as the same-store sales decline of 4% was partially offset by 2% unit growth. The third quarter started strong in the U.S. with momentum from My Hut Box and a robust marketing plan for the Chicago Tavern-Style Pizza, which translated to positive traffic growth for the full quarter and ahead of the QSR industry. However, product news and bounce back offers were not sufficient to compete against deep value offers in the market.
Throughout the quarter, several markets became more intentional in pursuing value including China, India and countries within the Middle East. As an example, in some of our pressured markets, we shifted towards a lower price point value over abundant value. At the same time, we are making progress in repositioning the brand over the long term, most recently hiring a new Chief Brand Officer and have plans to improve and expand our consumer relationship management and loyalty platforms next year.
Lastly, at Habit Burger & Grill, while overall sales remained under pressure during the third quarter, there were encouraging signs of momentum as the quarter progressed. Same-store sales trends improved each period in the quarter as the team leveraged recent accolades, including being recognized as having the number one grilled chicken sandwich by Daily Meal and the number one fast food burger inside by USA Today. These accolades were impressive given many of the other contenders have a broader national presence with larger store footprints. Clever marketing efforts, combined with refinements to Habit's media mix using Yum!'s proprietary marketing analytics platform, successfully ignited consumer excitement, driving visits to the brand to experience the award-winning Double Char and Tempura Green Beans. I'm pleased to see this positive momentum continue into the fourth quarter.
Now, I'll turn to our Good Growth strategy, starting with our people pillar. A hallmark of Yum! and a key driver of our performance is the strength of our talent base, including our deep bench of amazing leaders always ready to take on bigger roles. I'd like to start by congratulating Erika Burkhardt, who was recently promoted to Chief Legal Officer and Corporate Secretary for Yum!. Erika is a seasoned and respected leader throughout Yum! who has been with the company for over 20 years. She leads by example and has earned the trust of her peers and teams alike, providing invaluable insight and counsel on key initiatives across Yum! and our brands. I would also like to recognize her predecessor, Scott Catlett, for his years of service and the tremendous impact he made at Yum! and our brands as he starts a new chapter outside of the company.
Additionally, as we progress on our journey to becoming the leading global digital restaurant company, I'm pleased to announce Joe Park has been named President of Yum!'s Digital and Restaurant Technology Ecosystem in addition to his overall Chief Digital and Technology Officer role. He's doing a fantastic job bringing our vision to life for a fully collaborative digital and technology team across Yum! and is reinventing how the team works to drive increased consistency and efficiency in tools and processes as well as greater deployment of AI-driven capabilities, leveraging our global data assets and scaling our proprietary technology.
Also, during the quarter, for the first time in over two years, we brought nearly 200 of our most senior leaders from around the world together for our Global Leadership Summit. Our technology leaders at the Summit made up the largest functional group, demonstrating our focus on leaning into our digital leadership and our investments in AI. We showcased the progress we're making on our Good Growth journey and what we're doing behind the scenes to reinvent how we run the business by better exploiting our scale to drive future growth.
Moving on to the planet pillar of our Good Growth strategy. Just last month, we published our annual Global Citizenship & Sustainability Report. This report highlights Yum!'s long-standing dedication and continued progress and investments in our three priority pillars of people, food and planet. We are on track to reduce our greenhouse gas emissions by nearly 50% by 2030 and continue to make progress around sustainable packaging, building upon our harmonized cross-brand packaging policy.
In closing, in a difficult operating environment, we are encouraged by the underlying strength of the fundamentals of our business. Stepping back, our twin growth engines are demonstrating what makes them special through share gains at Taco Bell U.S. and strong franchisee investment in unit expansion in KFC International. Despite the numerous headwinds, we are proud of the resilience of our overall business model and our ability to deliver 6% core operating profit growth year to date. Importantly, our teams are making great progress in ushering our brands into the next era, leveraging Yum! scale and digital and technology capabilities to improve sales and operations leading to improved franchisee profitability and value creation for our shareholders.
With that, Chris, over to you.
