Taco War Grows Hot as Big 3 Go All Out to Secure Their Niches
It’s too early to predict the outcome, but what appears to be one of the decisive battles in the Mexican fast-food war is being fought here, on the streets of Orange County.
The Big Three taco companies in California--Taco Bell, Del Taco and Naugles--are spending millions of dollars in the struggle, investing in new decors and taking blue pencils to their menus in an attempt to secure their niches in the $2.7-billion Mexican restaurant industry.
Dressed in a new suit of cream and blue, the building on the northwest corner of Superior Avenue and 17th Street in Costa Mesa is perhaps a key site in the conflict and also sort of a culinary test tube.
It was once orange and brown like the 183 other Del Taco restaurants across the land, but in an effort to fill more seats inside with hungry customers, the Costa Mesa-based fast-food operator got out the paintbrushes, put oak tables inside and took its menu back to the kitchen.
Across the street from this refurbished restaurant is one of Del Taco’s main competitors in the burrito, taco and refried bean industry--Taco Bell, the Irvine-based unit of Pepsico Inc. The Taco Bell restaurant opened in October and is the largest of its approximately 2,300 outlets.
With 171 outlets in four states, Orange-based Naugles Inc., the third major player in the Mexican fast-food derby, has repainted all its exteriors white with bright stripes and is testing three separate new interior designs.
The Big Three are not relying exclusively on new designs to win customers and influence tastes but colors and style clearly count, the warriors believe.
Naugles recently completed one of its prototype interior designs at its restaurant on Grand Avenue in Santa Ana. Now, while resting their elbows on the new oak tables and their feet on the bright new carpeting, patrons at that restaurant can chew burritos while being tranquilized by the sight of plants on shelves around the room.
At Taco Bell, the major thrust for the past few years has been remodeling, adding seating area and making the restaurants “open, friendly and airy,” a company spokesman said.
“Remodeling pays,” said one industry expert. “It can’t make up for bad service (but) the consumer likes to believe you are paying attention to them.”
Intense Struggle
The new looks, coupled with menu changes and some new marketing tactics, illustrate the increasingly tough fight that fast-food operators are engaged in for customers. It is a particularly intense struggle for Mexican fast-food operators because other fast-food chains which typically offer burgers and fries also are dabbling with Mexican food offerings.
Mexican fast-food chains face “a lot of secondary competition,” one industry expert said.
As analysts see it, Del Taco, Naugles, Taco Bell and the other fast-food counters that color every major thoroughfare have a fundamental problem: intense competition.
“Too many seats and not enough butts to fill ‘em,” is the way one analyst summed it up.
Mexican fast-food operators have struggled in the 1980s to regain the momentum of the late 1970s when it appeared for a time that everyone in America either was having a taco for lunch or was thinking of one. The chains embarked on ambitious expansion plans and year-to-year sales growth peaked at 65% from 1976 to 1977.
What a difference a decade makes.
‘The (fast-food) industry is at a point of saturation,” said Don Rice, an analyst with Blunt, Ellis and Loewi in Milwaukee. Some smaller chains are declaring bankruptcy and others are on shaky financial footing.
Besides the greater number of players on the fast-food field, other factors have contributed to the dampening of growth in the industry.
Rice has this theory: “Joe Lunchbucket is strapped for cash.” Because the low interest rates prompted him to buy a house and a new car, Joe lacks the disposable cash he had before and thus utilizes his microwave oven at home to prepare food while watching something on his VCR.
Once the monthly payments for the car and house are under control, Lunchbucket will eat out at fast-food restaurants more often, Rice reckons. But until then, he predicts there will be more casualties in the fast-food restaurant ranks.
Although analysts say the popularity of Mexican food is not waning, the vigorous expansion in the 1970s and early 1980s has created pitched competition, particularly in two cities in middle America--Dallas and Denver. In those two markets, a number of smaller local chains are wrestling the majors for a share of the market. Casualties are expected before Joe Lunchbucket begins eating out more often.
Slowing Growth
A decade ago, Mexican food was the wild horse of the fast-food industry, galloping ahead at a pace faster than all other segments of the industry.
Five years ago, when Del Taco had 155 restaurants, the company looked ahead to 1986 and envisioned 400-450 restaurants. But competitors jumped in and the company didn’t do much growing until October, when it agreed to purchase 181 Mexican fast-food restaurants from New York-based W.R. Grace & Co.
The company plans to operate those restaurants as a separate company. For the 184 restaurants Del Taco currently owns or franchises, sales are expected to reach $105 million for the fiscal year ending April 30, 1987, up from sales of $98 million for the most recent fiscal year.
For its fiscal year ended June 30, Naugles, which is now 92% owned by Los Angeles-based Collins Foods International Inc., reported sales of $125.1 million but a net loss of $31.4 million.
But recent sales have been “quite strong,” the company said, and when the numbers are tallied for its first fiscal quarter ended Sept. 30, Naugles expects to report its first profit in six quarters.
“Naugles seems to be turning around,” said Barry Ziegler, an analyst with Tucker Anthony & Co. in New York.
Pepsico, Taco Bell’s parent, does not break out sales for its restaurant unit, which includes 14,000 eateries worldwide.
And so with new colors, new menu items and some new ads, the battle of the burrito stands escalates.
Although Taco Bell has remained with a fairly straight lunch and dinner Mexican food menu, Naugles and Del Taco are trying hard to sell breakfasts and continue to supplement their menus with typical Yankee food--burgers and milkshakes.
Last week, Del Taco added apples to its menu and said it plans to offer dinner combinations “in the near future.” Dinner items are being tested now, said Paul Hitzelberger, vice president. Fearful of tipping the competition, however, Hitzelberger declined to discuss what they might be.
For those who don’t want to gaze at the jumbo pictures of tacos and burritos that comprise the new interior decor at Del Taco, the dinners will be served in containers that can be reheated at home.
“The change for us is quite substantial,” said Hitzelberger about the new paint, fruit and the proposed supper menu. The Costa Mesa store, he said, will be “a model for change for the entire company.”
Experiment and Challenge
Taco Bell said its taco salads have been “very successful,” and it hopes to be equally successful with a “double beef burrito supreme” now being rolled out.
Marketing this and the other new offerings from the Big Three in Mexican fast foods is as much a marketing challenge as it is a kitchen experiment.
Taco Bell has turned to television to push its fare.
“Burgers are boring,” says the fellow in sunglasses and a Taco Bell headband as he crunches into a taco. It’s Jim McMahon, Chicago Bears quarterback, certified gonzo and lately a television pitchman for Taco Bell.
The ad is Taco Bell’s first venture into network television advertising.
Naugles also is turning to television but on a regional basis since its outlets are only in four states. A new television ad campaign will break next month, the company said.
Del Taco, which is concentrated in California, also is investing in broadcast media to pitch its new menu offerings.
Pizza in the ‘80s
But the heady growth days for Mexican fast foods may be over.
The new challenger for lunch and dinner supremacy is red and yellow and often comes with anchovies. Pizza, the growth food of the ‘80s, is sold in shops that have been rising across the land faster than dough on a hot day.
Pizza, it seems, may become the national food, some analysts say. From 1985 to 1986, sales at franchised pizza restaurants rose nearly 18%, according to the National Restaurant Assn., the Washington-based trade organization.
But then again, bringing Italy and Mexico together over one fast-food counter could stem the pizza revolution.
Taco Bell says its “pizzazz pizza,” sort of a combination pizza and burrito, has been highly successful.
NAUGLES Headquarters: Orange Restaurants: 171 units Earnings: Loss of $31 million Sales: $125.1 million
TACO BELL Headquarters: Unit of PepsiCo., based in Irvine Restaurants: 2,300 units Earnings: not available Sales: $1 billion (’85 est.)
Del Taco
Headquarters: Irvine Restaurants: 184 units, with purchase pending of 181 more Earnings: $3 million (est.) Sales: $105 million (est.)
