Jan. 11 (Bloomberg) -- For Yum! Brands Inc.’s Taco Bell, thinking outside the bun means going gourmet.
The chain that once used a talking chihuahua to sell chalupas is working with Miami chef Lorena Garcia to win back eaters who have become accustomed to Chipotle Mexican Grill Inc.’s style of Mexican fare. Menu items will include Chipotle staples such as black beans, cilantro rice and corn salsa, Greg Creed, Taco Bell’s president, said last month.
Taco Bell could use a boost. The chain has shrunk by more than 1,000 stores since 2000 and has been left behind as Yum expanded its KFC and Pizza Hut chains overseas. Chipotle, in the meantime, has been a stock market star, its shares tripling since the end of 2009.
“They have a tough road ahead to really reposition themselves as a direct competitor to Chipotle or Qdoba,” Mike Brumagin, a former Yum Brands senior project manager and Taco Bell store owner, said in an interview. Taco Bell has “always been about value.”
Taco Bell scored the lowest in food quality and atmosphere among limited-service Mexican eateries, including Chipotle and Jack in the Box Inc.’s Qdoba Mexican Grill, according to a September survey from Nation’s Restaurant News and consultant WD Partners.
Taco Bell is also in a market that is growing slowly. Sales at so-called limited-service restaurants increased 1.9 percent to $195 billion in 2010 and Taco Bell was behind McDonald’s Corp., Subway, Burger King Holdings Inc. and Wendy’s Co. in market share that year, according to Technomic Inc. The Chicago-based researcher hasn’t released 2011 figures.
Almost half a century old, Taco Bell was started by Glen Bell in Downey, California. PepsiCo Inc. bought the taco restaurant in 1978, a year after acquiring Pizza Hut. Pepsi later bought the KFC fried-chicken chain and spun off all three to become Tricon Global Restaurants Inc. in 1997. In 2002, Tricon became Yum Brands, now based in Louisville, Kentucky.
During the past decade, the brand has positioned itself as an affordable option for the young guy who “loves the lower price points,” said Peter Saleh, a restaurant analyst at Telsey Advisory Group in New York. Taco Bell has touted value meals with its “Why Pay More!” slogan and recently advertised a 12-pack of crunchy tacos for $10.
Last year, the chain received negative publicity when Beasley Allen, a Montgomery, Alabama-based law firm, filed a class action lawsuit claiming Taco Bell didn’t use enough real beef in its food to label it as such. Chief Executive Officer David Novak called the claim “absolutely false” and said the restaurant’s seasoned meat is 88 percent real beef. Beasley Allen dropped the suit.
For a chain that made its name peddling cheap eats in the wee hours of the morning, a higher-priced menu may not appeal to the restaurant’s primary customer. The Taco Bell frequenter is an 18- to 24-year-old, value-conscious male, says Jeff Bernstein, an analyst at Barclays Capital in New York.
“It’s definitely targeted to a younger crowd,” he said.
Former franchisee Brumagin also is skeptical and says introducing somewhat fancier, higher-priced food could go the way of a healthy menu experiment in the mid-’90s that he called an “abysmal failure.”
Taco Bell is clearly taking cues from its higher-end rival.
“Chipotle is an opportunity because what it’s done has expanded the trial and usage of Mexican food,” Creed said at the investor meeting in New York Dec. 7. “It’s got people to believe they can pay $8 for a bowl or a burrito.”
Taco Bell can make food “every bit as good as Chipotle,” he said, and instead charge less than $5.
While Chipotle’s $7 or $8 burritos include ingredients such as naturally raised pork seasoned with thyme and juniper berries, Taco Bell’s menu now features the 99-cent Beefy Crunch Burrito that’s topped with Flamin’ Hot Fritos.
Steve Ells, a classically trained chef opened the first Chipotle in 1993. Since then, the company has grown to more than 1,100 U.S. locations while the menu has stayed relatively simple and consistent. Taco Bell has about 5,600 U.S. stores. While Chipotle’s shares more than tripled from the end of 2009 through last year, Yum gained 69 percent during the same time and the Standard & Poor’s 500 Restaurants Index rose 67 percent.
Yum advanced 2 percent to a record close of $60.92 in New York today. The shares rose 20 percent in 2011.
Other fast-food chains have successfully remade themselves. Oak Brook, Illinois-based McDonald’s gradually changed into a somewhat more adult and upscale restaurant by introducing McCafe espresso drinks and splashing its stores with earth tones, said John Kokoska, a managing director at BDO Consulting Corporate Advisors LLC in Atlanta who advises restaurants.
Such an undertaking hasn’t been a priority at Yum, which has been more focused on expanding its KFC and Pizza Hut chains in China.
Since 2005, when Yum began reporting its China division separately, it has more than tripled revenue there while increasing store count more than 80 percent to about 4,200, topping McDonald’s 1,300 locations in the nation.
“Investors are in the stock as a play on China,” Jack Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview. Instead of a place for a quick, cheap meal, Yum restaurants in China are considered a nicer place for a family to go out for dinner, he said.
Taco Bell, meanwhile, hasn’t expanded much overseas. Yum has said it plans to sell hundreds of its U.S. stores to franchise owners. While the chain has stores in 21 countries, the U.S. accounts for 96 percent of its locations.
“It’s the tale of two cities,” John Gordon, principal at Pacific Management Consulting Group, a restaurant adviser in San Diego, said in an interview. Yum has “lost the capability to be able to run and work U.S. stores.”
In the coming months Taco Bell will “be announcing further details” about the menu and strategy, Rob Poetsch, a Taco Bell spokesman, said in an interview.
Taco Bell in 2010 generated about $400 million in operating profit, about 60 percent of the company’s U.S. total and 23 percent of its global earnings by that measure.
Yum has sought to sell franchises back to U.S. store owners, in part to minimize its risk from rising raw-ingredient prices, Gordon said. In the quarter ended Sept. 3, U.S. restaurant margin narrowed to 12.1 percent from 14.4 percent last year, Yum said in a filing.
Turning around a fast-food chain with fancy new menu items can be pricey, especially for franchised store owners, said Kokoska, the BDO consultant.
“It might mean kitchen equipment where the franchisee has to cough up the cash,” he said. “It isn’t just a matter of buying better ingredients.”
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