Off the Mark
Taco Bell struggles, but woes are not shared by other Mexican QSRs.

By Chuck Hutchcraft, Senior Editor

When the remnants of Russia's Mir space station crashed into the South Pacific in March, it was only fitting that the pieces didn't come close to the 40-by-40-foot target Taco Bell had floated in the ocean. For a bull's-eye by Mir's core, the quick-service-Mexican chain promised everyone in the United States a free taco.

Instead, it was just one more highly publicized miss for a chain that has been struggling through more than a year of bad news. Company-owned Taco Bells ended 2000 with a 5% decline in same-store sales (and down 9% for the fourth quarter ended Dec. 30, 2000). Chief Financial Officer Dave Deno recently projected that Taco Bell's same-store sales growth would be negative in the first half of this year, positive in the second half, and flat for the year overall.

Because Taco Bell, with more than $5 billion in annual systemwide sales, so dominates its category--the company claims its 6,700 U.S. units account for 72% of the quick-service Mexican restaurant segment's sales--its troubles have overshadowed the growth by many of that segment's other players. Thinking the Mexican QSR category in total is languishing also would be way off the mark.

According to Chicago-based restaurant consultants Technomic, Inc., Mexican restaurants produced the largest compound annual sales-growth rate, 13.3%, of any segment between 1979 and 1999 (see chart). For hamburger chains, that growth rate was 7.3%; for the QSR industry as a whole, the sales-growth rate was 8%.

That is the past, but the future remains bright as well. Analysts say the segment remains strong, with plenty of room for growth. The five largest burger chains had more than 77,000 units in 1999, according to Restaurants and Institutions' Top 400 rankings. The five largest Mexican QSRs totaled about 8,300 units.

"I don't think the sales issues at Taco Bell are endemic to the whole segment," says Rod Guinn, managing director of Boston-based FleetBoston Financial Corp.'s restaurant group. Far from saturated, the Mexican market is broadening, Guinn says. And he adds that Taco Bell's sales slide is not necessarily permanent.

EYES ON THE PRIZE

Guinn points to "very positive" indicators from the segment's second-largest chain, Del Taco, as well as Baja Fresh Mexican Grill, La Salsa Fresh Mexican Grill, Rubio's Baja Grill and Taco Cabana.

Del Taco's recent growth record is the opposite of Taco Bell's. The privately held, Laguna Hills, Calif.-based chain claimed in January to have achieved its 11th consecutive year of same-store sales growth. Last year, its 372 units averaged $927,000 in sales, up from $890,000 the previous year and roughly equal to Taco Bell's annual unit volume. Recent Del Taco openings in Arizona (one of its key expansion territories) are averaging $1.1 million annually, the chain claims.

Allan Hickok, senior research analyst for US Bancorp Piper Jaffray in Minneapolis, cautions that Del Taco remains a regional (primarily Southern California) chain with a long way to go before it catches up with Taco Bell, its troubles notwithstanding. Yet, also because it still is relatively small and private (controlled by a group of investors including chain Chairman and CEO Kevin Moriarty), "it is more nimble" and can do things that large companies can't do, such as changing menu prices and marketing strategies more rapidly, he says.

Del Taco certainly is doing all it can to give the big guy on the block a run for its money. In fact, Tim Hackbardt, Del Taco vice president of marketing, claims much of the pain Taco Bell is feeling has been inflicted by his company's aggressive marketing and customers' perception that Del Taco offers a higher food quality.

He also asserts that Taco Bell "has been languishing in a promotional no-man's land" since dumping its Chihuahua mascot (which it had been phasing out for a year) and "Yo quiero Taco Bell" campaign last July. "It was a hard act to follow. But for the past year or so, there hasn't been a consistent bang out there that says something significant about the brand." With all the problems, it's been facing, he says, Taco Bell "has taken its eye off the ball."

At Del Taco, on the other hand, "we think every day about our main competitor, Taco Bell, and how we can make ourselves look different," says Hackbardt.

That confidence sometimes has slid into swagger. A recent series of Del Taco commercials shot on the street in front of Taco Bell corporate headquarters (a few miles from Del Taco's home office) touted "products we have that they don't." That includes such standard fast-food fare as hamburgers, shakes and fries as well as Del Taco's "Big Fat Crispy Chicken Taco," which rivals Taco Bell's "gut-busting" burritos, including its Gordita, says Hackbardt.

A RUN FOR THE MONEY

Like Del Taco, many of the other major chains in the segment are regional powers with plenty of room to grow and innovative menus.

Cheyenne, Wyo.-based Taco John's, with $190 million in sales last year from 390 units, remains focused on massing stores in its 11-state Upper Midwest core territory, but also is moving slowly into new markets such as Kansas City, Mo. Average per-unit sales rose 2% to $475,500 in 2000. It is adding larger entrees to its menu, such as its Sierra Chicken sandwich (a whole chicken breast topped with cheese, salsa, lettuce, tomatoes and sauce and wrapped in flatbread).

Even one of the segment's smaller players, 100-unit, Oklahoma City-based Taco Mayo, is approaching the future confidently. It is remodeling units to a more upscale design, has adopted a new marketing positioning ("An Attitude for Great Mexican Food") and is adding menu items such as combo platters (priced up to $4.29) and a freestanding salsa bar.

Same-store sales for the 45 La Salsa Fresh Mexican Grill units operated by Santa Barbara, Calif.-based Santa Barbara Restaurant Group (another 47 are franchised) increased 7.2% in 2000. It has expanded its menu to include such offerings as Mahi Mahi Burritos (served with either a Sonora- or Baja-style sauce) and a mango salsa.

Not every Mexican QSR has experienced robust growth, of course. Sales for Santa Barbara Restaurant Group's five Green Burrito units were flat last year.

And Anaheim, Calif.-based CKE Restaurants recently agreed to sell its 125-unit Taco Bueno chain to a private equity buyout firm. CKE management said new ownership would be able to provide Carrollton, Texas-based Taco Bueno with more capital and growth opportunities and will let CKE focus on reviving its troubled Hardee's burger chain.

PLACING BLAME

To be fair, not all of Taco Bell's problems have been self-inflicted. Last year's bankruptcy filing by its food and supplies distributor AmeriServe caused inventory disruptions for months. And the chain suffered a major blow when supermarket taco shells carrying the licensed Taco Bell name were found to contain genetically modified corn and were pulled from shelves. The restaurants didn't serve the same taco shells, but the company says sales suffered anyway.

But the chain bears responsibility for many other problems. With surprising bluntness, Taco Bell President Emil Brolick (who joined the company from Wendy's last summer) told the Wall Street Journal in February, "We are not doing a great job in terms of quality, in terms of friendliness, in terms of speed, in terms of cleanliness in the store."

In a recent Securities and Exchange Commission filing, Tricon Global Restaurants reports that as many as 1,000 franchisees of its Taco Bell subsidiary are facing financial problems as a result of declining store sales and "exacerbated by the grocery product recalls." The company says it may have to purchase a significant number of restaurants from these franchisees if it can't help them restructure.

Taco Bell executives declined interview requests for this story, but the company previously has denied reports that it brought about franchisees' financial woes with a refranchising program (begun after Tricon was spun off from PepsiCo) that sold company-owned stores at too high a price.

CARVING A LOW-END NICHE

Hickok says rising energy prices and the intensely competitive fast-food market also are parts of the problem. He estimates that the majority of Taco Bell's customer base falls within the three-fifths of American households earning $40,000 or less a year. This group of what Hickok calls "value-conscious customers"--especially in California--has had discretionary dollars reduced by rising home energy costs.

Taco Bell carved a niche at the low end of the fast-food price scale. "You could got to Taco Bell for a gut-busting experience for $3 or less," Hickok says. Holding that audience has forced Taco Bell to keep prices down and coupons plentiful, which hurts store profits. But Brolick says he wants to add more higher-ticket foods and reduce couponing.

Guinn says that might be easier said than done. "Taco Bell has identified itself so strongly with [the one-dollar-and-below price point] that it might have a hard time breaking out," he says.

Adds Hickok, "When everyone thinks of Taco Bell, they think of burritos for less than a buck. And now you want me to spend $1.79 for a burrito? I don't know."