Yum Brands' $375 million acquisition of Habit Restaurants gives the owner of Taco Bell, KFC and Pizza Hut an opportunity to break into the fast-casual industry at a time when fast-food restaurants are struggling.
Habit operates Habit Burger Grill, a premium burger chain founded in 1969 with nearly 280 locations, including several in China. The acquisition is expected to close by the end of the second quarter.
"As a fast-casual concept with strong unit economics, the Habit Burger Grill is a fantastic addition to the Yum family and has significant untapped growth potential in the U.S. and internationally," Yum CEO David Gibbs, who took the reins of the company last Wednesday, said in a statement.
The deal comes as the U.S. fast-food industry has struggled to reverse declining traffic trends. Consumers who are health-conscious and pressed for time are instead turning to fast-casual chains like Chipotle Mexican Grill or Sweetgreen for meals that they perceive as higher quality.
While the overall fast-casual industry has seen its traffic growth slow in recent years, it is still outpacing that of fast-food restaurants. Visits to U.S. fast-casual restaurants increased by 3% in the year ended November 2019, according to data from The NPD Group's Crest service.
Taco Bell, which is consistently Yum's top performer, has managed to grow its sales by offering customers competitive value deals and quirky limited-time offers. KFC has seen success by focusing on international growth: Its U.S. sales only make up 17% of its business. But Pizza Hut, the laggard of Yum's portfolio, is closing hundreds of stores as the company tries to put a greater emphasis on pick-up and delivery orders, rather than dine in.
In its fiscal third quarter, Habit reported same-store sales growth of 3.1%, buoyed by price hikes as California labor costs jumped and traffic declined.
The deal also allows Yum to reenter the crowded burger category since it sold A&W Restaurants, pitting Habit against the likes of McDonald's, Five Guys and Shake Shack. But the premium burger segment, in particular, has become saturated. Fast-growing burger chain Burgerim is reportedly weighing bankruptcy.
Habit will be Yum's first fast-casual restaurant acquisition since it went public more than two decades ago under the name Tricon Global Restaurants.
If it succeeds, it could rake in rewards like McDonald's did with its Chipotle investment. The fast-food giant started investing in the burrito chain in 1998 and cashed out in 2006, making more than $1 billion off of the investment.
"Since completing its transformation to a wholly franchisee company, YUM has been intimating that it would be receptive to an acquisition and we believe starting small is appropriate to mitigate risk and prove out the company's ability to successfully integrate and grow a concept," Bernstein analyst Sara Senatore wrote in a note Monday.