Alabama-based Beasley Allen law firm finally withdrew voluntarily the class action lawsuit against Taco Bell, a unit of Yum! Brands Inc. (YUM). According to sources, the resolution did not involve any financial consideration.
The lawsuit was related to the content and quality of Taco Bell’s beef products. It was filed on January 19, 2011 in a California court on behalf of a Taco Bell customer.
Taco Bell was charged that its “seasoned ground beef” violated the beef standards of the U.S. Department of Agriculture (USDA). The company was alleged of not having enough beef in its product as promised by the "taco meat filling" commercial and instead, mostly using fillers.
The company fought back the accusation saying that they used 100% USDA-inspected beef, which was then cooked it in its proprietary blend of seasonings and spices. Taco Bell also added in its defense that its product contained 88% beef, not 35% as alleged by the law firm.
In fact, following the litigation, Taco Bell offered its Facebook fans a free taco, in early-February, as a part of the anti-lawsuit campaign. It also carried out a social media campaign, prompting Twitter users to extend their support.
However, while Taco Bell of Yum! asserted that it did not made any changes in marketing and product disclosure, the law firm commented that it spotted some modifications, which led them to dissolve the case.
During three months since the filing of the lawsuit, Taco Bell’s sales were hurt to some extent from this negative publicity, although the company failed to quantify the impact. Taco Bell has a 52% U.S. market share in Mexican quick service restaurant sales. Yum! is slated to report its first quarter 2011 earnings today after the closing bell. In the U.S. segment, the impact of this accusation is something to be watched for in the first quarter results.
We have a Zacks #2 Rank (short-term Buy recommendation) on Yum! shares. We also reiterate our long-term Neutral rating. Close on the heels of Yum! Brands, one of its primary competitors, McDonald’s Corp. (MCD) will report its first quarter 2011 on April 21, 2011.
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