The Doritos Locos Tacos effect is wearing off at Taco Bell (YUM). After two years on the market, the popular taco-in-a-flavored-Doritos-shell is not the sales machine it used to be.
In the quarter after the company launched DLT in 2012, same-store sales jumped 13 percent. Then the Cool Ranch-flavored variety, which hit stores in March 2013, resulted in a smaller, single-digit sales increase. With each successive DLT launch—Fiery DLTs last summer and this year’s Spicy Chicken DLT—the impact has diminished.
The trend offers some insight into how long Taco Bell—whose strategy is to introduce eight to 10 new items each year—can count on a new product to increase sales. Sara Senatore, senior analyst at Sanford C Bernstein, says the third-year blues are not uncommon in this cycle: Restaurants spend the first year building up a product, and by the second year consumers know its there, but by the third year it gets harder to continue boosting comparable sales.
The start of 2014 was the first quarter in two years that saw negative same-store sales. “While the quarter was below our ongoing expectations, we remain confident Taco Bell has all kinds of mojo going for it as we expect another strong year,” Yum’s chief executive, David Novak, said during an earnings call this spring, referring mainly to the launch in late March of a breakfast menu nationwide that set out to challenge McDonald’s dominance in fast-food breakfast.
Unfortunately, the Spicy Chicken Cool Ranch DLT, introduced in March, “underperformed vs. our expectation,” said Novak during an earnings call last week. “We believe it ended up being too much of a niche product to overlap the 15 percent growth we’ve had over the past two years with the introductions of Doritos Locos Tacos and then Cool Ranch.”
It was breakfast items, including the A.M. Crunchwrap and Waffle Taco, that recently gave the chain a boost. In its first few months on the market, breakfast grew to 7 percent of Taco Bell’s sales, which Novak described to investors as “a great start.” Yet, even with new dollars coming in from breakfast, overall same-store sales for the second quarter increased only 2 percent, not 7 percent—in other words, sales of Taco Bell’s regular nonbreakfast items were down.
Executives expect the second half of the year to be stronger. New menu items—such as the recently launched Quesarito—are in the works for all meals; the company estimates breakfast will add about $70,000 to $120,000 in sales per store; and mobile ordering is on its way. Yum still plans eventually to have 8,000 Taco Bell locations in the U.S.