Taco Bell: A Ringing Success : Fast Food: The company's success is mirrored by its ability to lower prices and continue to report substantially higher earnings. The increased popularity of Mexican food helps too.

By MARY ANN GALANTE

Nov. 5, 1989 12 AM PT

TIMES STAFF WRITER

IRVINE — Sometimes the tried-and-true methods work the best.

While Taco Bell is investing millions of dollars in fancy technology for the future, the Mexican fast-food chain has been making money the old-fashioned way--slashing prices.

The chain’s national discounting strategy, with tacos and other key items selling in some areas for as little as 49 cents, has made Taco Bell one of the hottest fast-food operations in the country.

The Irvine-based company, which just opened its 3,000th restaurant, expects chainwide sales to top $2 billion this year, a 25% jump over 1988 and almost four times what they were seven years ago. At the same time, sales per unit are up an average of 21% this year over last, with 1989 sales per unit expected to top $700,000. A total of 3,080 Taco Bell units are projected to be opened by the end of the year.

The PepsiCo subsidiary’s sizzling performance is one of the most impressive turnarounds in the quick-service industry in recent years. And Taco Bell is taking a bigger bite of the $60-billion-a-year fast-food market at a time when there is fierce competition within the industry.

Much of the chain’s recent success has been nourished by Taco Bell’s “value-menu” program, a discount program that dropped the price of six popular items--including tacos, tostadas and burritos--from 79 cents to as low as 49 cents in some areas. The resulting lines of customers more than make up what Taco Bell gives up by lowering prices, company executives said.

The company’s revamping-- including nationwide expansion, broader menus, better advertising and, of course, cheap food--has allowed Taco Bell to snare nearly 70% of the $2.8-billion Mexican fast-food market. At the same time, the chain also has captured a 3% share of the overall fast-food market, up from 1% in 1982.

“Over the long period, it (Taco Bell) has been a fabulous business,” said Dean Witter Reynolds analyst Lawrence Adelman. “It’s the ability to lower prices and still report substantially increased earnings.”

Along the way, Taco Bell’s growth has been helped by a boom in the popularity of Mexican food. Traffic counts in quick-service Mexican restaurants--one of the fastest-growing food segments in recent years--were up 9.4% last year, the National Restaurant Assn. reported.

Martin and the Taco

Taco Bell’s turnaround began in 1983, when John Martin, former president of Burger Chef Systems and Hardees, took over as the chain’s chief executive and president. At the time, sales were slumping, profits were losing steam, restaurants were small and outdated, and a lot of folks weren’t even sure what a taco or tostada was.

PepsiCo bought Taco Bell in 1978 but for several years did little to change the chain’s menu, restaurants or operations. So within four years, by 1982, sales had dropped an average of 16%.

“The chain was deficient in literally every part of how it did business,” Martin recalled in a recent interview. “It wasn’t making much money, and everybody said that Taco Bell would be out of business by the turn of the decade.”

So Martin launched what he called the “four-by-four strategy,” an ambitious plan that meant increasing the number of restaurants from 1,489 to 4,000 and achieving companywide sales of $4 billion by the end of 1991--a goal he claims still is within the chain’s reach with continued expansion and acquisitions.

“Everyone thought it was an unbelievable proposition,” Martin said. “The answer was that if we didn’t, we weren’t going to be around.”

The strategy involved a key change in corporate thinking: “We had to understand that our prime competition was not the other Mexican feeders--it was fast-food in general,” Martin said. That meant going head-to-head with McDonald’s and other major fast-food chains.

To do that, Taco Bell stepped up new store building and acquisitions from 70 to 80 stores a year to about 300 to 350, largely into the Midwest, Southeast and Northeast.

The company set about to spruce up its image. The nondescript signs and logos showing a Mexican sleeping under a sombrero were replaced with the bolder, more recognizable yellow bell on a bright red background. And older stores that looked like plastic adobe mini-missions were remodeled with lots of bright, arched windows.

Drive-through windows were added and are now in about 80% of Taco Bell stores.

The chain’s television advertising budget was quadrupled from $20 million in 1982 to about $80 million this year. Overhead and administrative costs--such as product purchasing--became more efficient as well.

There were minor changes--including spiffier packaging and replacing the dowdy, brown uniforms worn by hourly workers--as well as more sweeping ones, such as adding training centers, dual production lines and more up-to-date cooking equipment.

Then the menu--which hadn’t varied much in years--was spiced up. Taco Bell added some new items--including Mexican pizza, Nachos Bell Grande, soft-shell tacos, fajitas--and tried then scrapped others such as seafood salad.

Unit Sales Were Down

The changes helped the chain’s sales grow steadily until 1988. By September of that year, Taco Bell’s operating profits and sales had slid through the preceding nine months. But its average sales per unit--the industry barometer of performance--were sagging.

Martin at the time blamed the decline on higher food costs, capital investments and a general softness in the industry.

Some analysts saw it differently. Taco Bell “had gotten away from the perception as a value purveyor,” said Jay Nelson, an analyst with Brown Brothers Harriman & Co. “A lot of the new menu items had been priced at around $2. And that wasn’t the way to go.”

So last December--with the industry awash with rumors of Martin’s impending departure--Taco Bell went nationwide with its “value-menu” program that it had begun testing in late 1986 in selected markets.

With the discounted pricing, Taco Bell was making a big pitch for what the industry calls the “heavy user”--the 18- to 34-year-old customer who eats fast-food an average of 17 times a month.

They are customers like Paul Quinn, a 30-year-old salesman from Costa Mesa, who eats out virtually every night of the week. Munching a soft-shell taco last week, Quinn explained how Taco Bell had won him over.

“I can grab lunch for under $2.50,” he says. “Lowering prices really got me into coming here because now I can afford to eat it” three or four times a week.

“It’s quick, spicy, good and cheap,” added Ken Gaitan, 26, a Costa Mesa mortgage banker who often eats at Taco Bell. “Pepsi did for Taco Bell what McDonald’s did with hamburgers--high standards with quality, and taste that’s consistent.”

That perception has given Taco Bell the boost it sought. The chain’s sales last year were $1.6 billion--up only slightly from $1.5 billion in 1987. Taco Bell’s 1988 operating profits before tax, meanwhile, totaled $81.6 million, contrasted with $91.4 million the year before.

But for the three quarters of 1989--with the cut-rate prices and some other promotions in place--Taco Bell has recorded year-to-date, before-tax operating profit of $83.9 million, up 50% from the same period last year.

At the same time, average sales per store, which were $380,000 in 1982, are projected to top $700,000 this year, up from $589,000 last year. By contrast, industry leader McDonald’s Corp. averages $1.5 million per restaurant.

There was never much doubt that slashing menu prices by 30% would bring in more hungry diners. The big question was: Could the sales growth be sustained?

“We didn’t know whether it would be like Sears--where they cut prices, got a big boost in sales, then it all fell apart,” said James J. Murren, a restaurant analyst with C.J. Lawrence in New York.

But that doubt seems to have faded. Even those units that rolled back prices two or three years ago as part of market tests are still seeing double-digit growth in sales and transactions.

“It’s evident now that the price-value menu is creating sustainable sales,” Murren said.

PepsiCo’s Strategy

Taco Bell’s price rollback strategy is very similar to what PepsiCo has done with its two other fast-food chains--Pizza Hut and Kentucky Fried Chicken, both of which are leaders in their market segments.

Especially in the fast-growing pizza and Mexican segments, PepsiCo has taken products “that are very average and, with good pricing points and good advertising, established themselves at the top of people’s minds for those products in most areas of the country,” said Robert Bernstein, an analyst with Edward D. Jones & Co.

Even so, some analysts question whether Taco Bell will be able to continue racking up sales. “Growth is easier when you have a smaller base,” said Pavlos M. Alexandrakis, an analyst with Argus Research. “Whether you can sustain sales depends on a lot of things--will the market be tougher in five years? Yes, I think it will.”

Moreover, Taco Bell’s best weapon--discounted prices--has alienated some of its franchisees. Lower prices mean that more customers are needed to maintain sales levels. And an increase in customers requires more be spent on labor and other expenses by the franchisees.

“A lot of franchisees are terribly concerned about bottom-line profits,” complained one major California franchisee, who asked not to be identified. “At best, (franchisees’) profits will be flat for most of this year and it appears the same for 1990.”

The price rollbacks probably lock Taco Bell into those rates for the immediate future. But Murren said it doesn’t prohibit them from making “sneaky price increases,” such as adding 5 cents to the price of a burrito, while keeping taco prices down.

Breakfast Coming

And the company has plenty of other ideas on its plate. One of the most promising is the introduction of a breakfast menu. The company plans to offer breakfast items, such as soft-shell tacos with various fillings, in early 1991.

“It’s something we’re thinking about,” Martin said when asked about the long-range possibilities.

Taco Bell is also conducting ongoing research into consumer preferences, speedy delivery and quality control.

The chain already is testing in about 300 restaurants a concept known as “K-Minus,” meaning Kitchen Minus--which means that much of Taco Bell’s food preparation would be shifted to outside vendors. By buying already fried taco shells or cooked and seasoned ground beef, for example, Taco Bell restaurants can shave labor costs by no longer having to do their own chopping, dicing, cooking and seasoning.

Then there are the high-tech gadgets. Taco Bell--like many of its competitors--is tinkering with the possibility of machines that will take orders, wrap and bag tacos, and deliver orders to customers in about half the time and at about half the cost required by workers.

Like the Omnitron. That’s the gadget that Taco Bell plans to test in restaurants within 30 days; it will fill drinks more quickly, put lids on them and save 15 seconds per 32-ounce glass without spilling a drop.

Changes are being considered for outside the restaurants as well. Martin talks of the eventual possibility of Taco Bell-labeled tortillas or salsa or the chain’s burritos and tostadas being sold in office buildings, strip centers, malls, and even on turnpikes and at airports.

With the new technology and the enormous financial and marketing muscle of PepsiCo, Martin insists that Taco Bell can win a much larger share of the fast-food market. He is so confident that he has set a new goal--called “three-by-10,” which aims for 10,000 U.S. restaurants, each with $3 million in sales, by the year 2001.

Some analysts say Martin’s long-range objective is far-fetched.

The three-by-10 goal “is unbelievable,” analyst Bernstein said. “It would be like McDonald’s doubling (sales) in those years. And Taco Bell isn’t up to McDonald’s (per store average) right now. . . . I wouldn’t want to bet on whether or not they can do it.”

But Martin remains undeterred.

“We’re going to keep doing what we’re doing,” he said. “All of PepsiCo today is a $10-billion company. We should pass that in another five years.”

TACO BELL TAKES ON THE FAST FOOD GIANTS