Yum! Brands high on The Habit

NEW YORK — The timing of Yum! Brands, Inc.’s acquisition of The Habit Restaurants Inc. could not have been worse. The Louisville, Ky.-based parent company of Pizza Hut, KFC and Taco Bell completed its $375 million purchase of Irvine, Calif.-based Habit on March 18, 2020. A day after the transaction, stay-at-home orders were issued for California in connection with the COVID-19 pandemic, effectively shutting down visits to restaurants.

And while there have been challenges along the way over the past three years, executives at Yum! remain high on The Habit Burger Grill, which occupies a spot within fast-casual behind a California-inspired menu with ingredients perceived as premium.

Habit offers a variety of made-to-order items chargrilled over an open flame. Menu items include charburgers, hand-filleted and marinated chargrilled chicken sandwiches, sushi-grade chargrilled ahi tuna sandwiches, fresh salads, sides and handmade frozen desserts. The Habit Burger Grill was named Best Regional Fast Food in USA Today’s 2019 Best Readers’ Choice Awards.

In a June 27 presentation at the Bank of America and NYSE European Investor Conference, Christopher Lee Turner, chief financial officer of Yum! Brands, said the company believes there will someday be “thousands” of Habits around the world. The company currently has more than 330 restaurants in 14 US states and 11 international locations.

The acquisition of The Habit was noteworthy for Yum! Brands not only because of the timing of COVID, but also because it represented the first acquisition in many years for the company. The chain also competes in the fast-casual industry, while Pizza Hut, KFC and Taco Bell are traditional quick-service restaurant chains.

“The last (acquisitions) we’ve done were a little bit more turnarounds — I don’t think were the right — were not the turnaround play,” Mr. Turner said. “Habit was grounded in growth. You had an iconic brand in Southern California. If you go to Southern California, there’s a cult following for The Habit.

“Starting to expand outside of California, it needed some help with the growth capabilities. They didn’t really know how to do franchising and needed some development expertise that could help make the brand more distinctive. We thought we could provide those.”

In addition, Habit may be described as “subscale,” and Mr. Turner said subscale brands in early 2020 were starting to fall out of favor in the market.

“Habit had north of $1 billion valuation at one point,” he said. “Of course, we acquired it in the $400 million range. So, we could leverage our scale.”

But when COVID hit, Yum! Brands and Habit had to pivot.

“More than 50% of the sales were in the dining rooms,” Mr. Turner said. “So, our first focus was just stabilize sales and sustain sales when this channel that represented half of the business sort of went away overnight. So that was the primary focus.”

Eventually, Yum! Brands was able to refocus on the integration plan and Mr. Turner said the company is optimistic Habit will provide new growth opportunities for franchisees in its system in the long run. In March, Shannon Hennessy was promoted to chief executive officer of The Habit Burger Grill Division after joining the brand in July 2022 as president.

“She focused on getting the P&L to the right place,” Mr. Turner said. “Margins were a little compressed with the inflationary pressures. She’s focused on that. And then they’re going to focus on a return to strong same-store sales growth while we have (the) development engine going.”