Are Taco Bell Corp.’s customers switching camps to dashboard dine at rival Del Taco Inc.?
After some high-profile setbacks at Irvine-based Taco Bell, Del Taco of Laguna Hills has seen double-digit increases in same-store sales while Taco Bell has reported big declines, industry watchers say.
“Negative publicity with the Taco Bell name hurt them and maybe in turn helped Del Taco,” said Ron Paul, president of Technomic Inc., a Chicago-based firm that tracks the fast food industry. “It’s a battle out there and there’s not much customer loyalty. So anything a chain can do to keep in the forefront will build its market share.”
In 2000, Del Taco counted 48% of the Los Angeles market for Mexican fast food, according to Villa Park-based market tracker Sandleman & Associates, up from 32% in 1999. Taco Bell had 52% of the market last year, down from 68% in 1999, according to the firm.
Del Taco President Ron Petty said the company’s expanded TV advertising has helped boost sales. Last year, Del Taco started poking fun at Taco Bell in a series of ads.
“We certainly are taking market share from our major competitor,” Petty said. “Our media strategy has given us TV coverage in 80% to 90% of our markets.”
Taco Bell, one of three chains owned by Tricon Global Restaurants Inc., is seeking to reverse its sales slump and overcome a taco shell debacle last year. Kraft Foods Inc., which licenses the Taco Bell name for its supermarket taco shells, recalled products last summer after trace amounts of genetically altered Starlink corn for animals were found in the shells. Taco Bell’s own restaurant shells are made from a different recipe, but the company recalled them anyway.
And Taco Bell has set up an estimated $15 million fund to assist struggling franchisees in the wake of the taco shell fallout and same-store sales declines of 12% in October, 13% in November and 11% in December. According to reports, as many as 20 franchisees that operate up to 500 restaurants have taken the assistance.
“We are intent on helping our franchisees succeed even in times of declining sales,” Tricon spokesman Jonathan Blum said. “We’ve proactively established a finance assistance committee to provide assistance to franchisees most in need as a result of the Starlink incident and during the winter months,typically Taco Bell’s slowest sales period.”
Blum said Tricon and Taco Bell also have established a bridge loan, called a winter relief fund, for qualifying franchisees.
Meanwhile, the Advisory Council of Taco Bell Franchisees has budgeted up to $1 million for legal representation, professional experts and other expenses for its 350 members who run 5,500 stores.
Del Taco appears to be feeding off Taco Bell’s defectors. The company has 11 years of same-store sales growth under Chief Executive Kevin Moriarty, and restaurants now report a sales average that is among the top in the industry at $927,000, vs. $918,000 per restaurant at Taco Bell.
The average annual store sales for the fast-food industry ranges from $750,000 to $1 million with the Mexican segment typically tracking on the lower end of the scale, according to Robert Sandleman, president of Sandleman & Associates.
Petty, who first met Moriarty at Burger King Corp. in the mid-1980s, has been spearheading Del Taco’s expansion. He spent 12 years as head of Burger King’s worldwide development, overseeing a doubling in restaurants to 4,000 from 1978 to 1983. Later, Petty became president and chief operating officer of Burger King, now a unit of Diageo PLC. More recently, Petty was president and chief executive of Advantica Restaurant Group Inc.’s Denny’s from 1993 to 1996.
Under Petty, Del Taco has negotiated some 33 new area development contracts with franchisees to build 206 restaurants in the next three to five years. So far, 41 of those are either open, under construction or are going through the permit process. Del Taco expects to open more than 50 stores this year.
Del Taco, a privately held business with annual sales of $319 million in 2000, has 372 stores in 10 states including 18 restaurants it opened last year in one of its newest markets, Arizona.
“We will have to start moving into the Midwest because we have done the Western U.S.,” Petty said. “Eventually we will move east.”
Since joining Del Taco two years ago, Petty has been using real estate experience gained at McDonald’s Corp. and Burger King to grow the chain nationally.
“Ron and Kevin don’t have to worry about what the analysts will say tomorrow,” said Tim Hackbardt, Del Taco’s vice president of marketing. “They just worry about what the consumer will say tomorrow.”
Janet Lowder, president of Restaurant Management Services in Los Angeles, said she believes Del Taco’s strategy could pay off.
“It’s probably good that they are private and are slow-growth,” Lowder said. “Some companies are up and some companies are down as usual, and other chains in their category are not doing well.”
While the bulk of Del Taco’s chain is centered in California, the past two years the company has been expanding into other states such as Arizona, Colorado, Utah and Washington. Officials also plan to further expand in existing markets such as Orange County, San Diego, Los Angeles and Las Vegas.
The clustered stores allow the company to focus its advertising, officials say.
The company’s latest advertising,featuring an employee character named Dan who tries to show up Taco Bell with quips such as “My burrito is bigger than your burrito”,was up in spending by 30% last year to $13 million. But Del Taco’s pitches remain dwarfed by Taco Bell’s $203 million in annual ad spending.
Despite gains, Del Taco remains a distant No. 2 to Taco Bell, which counts 7,000 locations and annual sales of $5 billion. Taco Bell also holds 72% of the market, according to industry trackers.
Still, Del Taco continues to find new ways to expand. Recently it signed a contract with Charlotte, N.C.-based Compass Group to open restaurants on military bases in the U.S., Puerto Rico and worldwide, including a couple set for Italy.
Del Taco also signed a contract this month with Houston-based Equiva Services LLC to further develop co-branded stores with Texaco stations as well as convert Texaco stations to Del Tacos. So far, the company has 13 co-branded sites open, three under construction and two others that were recently approved.
“Some of the stores will be a Del Taco without gasoline, some will have gas and some will have gas, a car wash and a convenience store,” Petty said.
Petty said he isn’t worried about the prospect of a slower national economy and tighter consumer purse strings.
“Generally, our business does well in a soft economy because people tend to go down from other restaurants that are more expensive,” he said. n
