17901 Von Karman
Taco Bell Corp. is a California-based fast service restaurant chain that specializes in Mexican-style fast food. Taco Bell--with 1995 sales in the United States of $3.5 billion dollars--held the largest share of the Mexican-style restaurant market in the United States. In mid-1997 the fast food chain was owned by the giant PepsiCo empire and was expected to soon become part of the restaurant holding company TRICON Global Restaurants, Inc., a far cry from its modest beginnings as a hot dog stand.
Taco Bell Precursor Opens in 1946
In 1946 Glen Bell, a World War II veteran, opened a hot dog stand in San Bernardino, California. The 23-year-old Bell decided to start his own business after working for a local gas company and a railroad system. Having bought a gas refrigerator at a discount from the gas company, Bell sold it for $400 and used the money to secure a lease for the food stand site and to buy building materials. Confident that the postwar economy would support his endeavor, Bell opened the shutters of "Bell's Drive In" for business later that year.
Bell began unassumingly, remaining a one-person operation and serving only take-out food. His first day of business brought in $20 over a 16-hour day. Working long hours--the stand's hours of operation extended from nine a.m. to midnight--he eventually averaged $150 a day in business during his first year.
In 1952 Bell sold his first stand and set about building an improved version. His new menu comprised hamburgers and hot dogs, then staples of the emerging fast food industry. Coincidentally, just as Bell built his second stand, the McDonald brothers were building their first fast food restaurant, also in San Bernardino. By 1955 Ray Kroc, a traveling salesman touting milk shake machines, would link up with the McDonald brothers and form the giant McDonald's hamburger chain.
Bell Experiments with Tacos in 1950s
The phenomenal worldwide success of the McDonald's restaurant chain would come later. But its successful beginnings in San Bernardino were enough to prompt Bell to find a niche in the fledgling Mexican-style food business. He settled on selling tacos by volume, rather than making and stuffing them individually, as was the case in full-service restaurants. As Bell later noted in a 1978 speech to a Taco Bell franchise convention, "My plan for experimenting with tacos was to obtain a location in a Mexican neighborhood. That way, if tacos were successful, potential competitors would write it off to the location and assume that the idea wouldn't sell anywhere else."
After choosing a location in an Hispanic neighborhood of San Bernardino, Bell began selling a chili dog from which he eventually developed his traditional taco sauce. He also developed taco shells that could be easily and quickly fried and later stuffed with ingredients. This stand was so small that Bell sold his first tacos at 19 cents apiece from a window on the side.
In 1953 Bell opened a second stand in Barstow, near San Bernardino. Tacos sold well in that locale as well, and Bell recruited Ed Hackbarth to run the stand. A year later, Bell began the construction of three Taco Tia stands in San Bernardino, Redlands, and Riverside. When the new stores were completed a year later, Bell achieved $18,000 in sales in his first month.
A small commissary was soon built to serve the three Taco Tia outlets and three other Bell's Drive Ins outlets. Here vegetables were prepared daily, as were deep taco shells and sauces. To maintain freshness, meat was cooked at the individual restaurants.
In 1956 Bell sold his three Taco Tia restaurants to fund his expansion into the Los Angeles restaurant market. A recessionary economic atmosphere, however, drove up construction costs. Bell eventually went into partnership with four members of the Los Angeles Rams professional football team to reduce his start-up risk. In 1958 they formed the El Taco restaurant chain, which included a central commissary to serve up to 100 units. Three outlets were initially opened, producing profits of $3,000 after the first year of business.
First Taco Bell in 1962
Bell wanted to remain independent, however, so in 1962 he yet again sold his share in a successful restaurant chain and, a year later, opened the first Taco Bell outlet in Downey. Eight more outlets were built in the Long Beach, Paramount, and Los Angeles regions.
During this period the concept of franchising was catching on, first with car dealerships and then throughout the restaurant industry. Bell quickly seized on the idea. In 1964 Kermit Becky, a former Los Angeles policeman, purchased the first Taco Bell franchise in the South Bay area of Los Angeles. Other franchise buyers followed.
In 1965 Bell hired Robert McKay as general manager of the company to help franchise Taco Bell. McKay would later recall the challenge before him in Forbes: "[F]ranchising was really hot. Everyone wanted franchises in the mid-sixties. Then came the shakeout a few years later and franchising no longer was the easy game it once was."
Public Offering in 1965
A year later, the Taco Bell chain went public on the Pacific Stock Exchange, enabling Bell to receive bank financing for the first time. Previously, all financing had been secured on a private basis. (The first Taco Bell was opened with 40 shares, each worth $100 and held mostly by Bell's family.)
In 1967 McKay was named president of Taco Bell. At that time the company owned 12 restaurants, with an additional 325 franchises. By 1970 Taco Bell had become a $6 million operation, producing annual profits of approximately $150,000. The fast food chain's success soon drew the attention of PepsiCo Inc., the snack food and soft drinks giant, which was seeking to diversify into the restaurant business.
During this time, Pizza Hut, a PepsiCo subsidiary, launched Taco Kid, a Mexican food concept to challenge Taco Bell. The launch failed, and Pizza Hut soon had to write off its investment. PepsiCo then altered its strategy and began wooing Glen Bell in order to buy Taco Bell outright. In February 1978 a deal was struck in which the Mexican fast food chain was purchased for just under $125 million in stock.
PepsiCo Leadership in Late 1970s
PepsiCo's strategy in acquiring Taco Bell was simple; the fast food chain dominated the Mexican food market, so PepsiCo was buying market share. For PepsiCo the challenge was to make Taco Bell less a regional ethnic food phenomenon and more a national fast food chain. Glen Bell had originally sought to set Taco Bell apart from other fast food chains, McDonald's in particular, and its preeminent position among other Mexican food chains, most all of them regional or local rivals, was already secure.
PepsiCo's decision to reposition Taco Bell was a challenge to the fast food giants on a national scale. The PepsiCo strategy emphasized that Taco Bell outlets would sport spartan simplicity in decor and menu, with a concentration on predictable quality, affordable prices, and clean and convenient surroundings. Taco Bell also moved swiftly to redesign the company logo. The old logo, an Hispanic man dozing under a giant sombrero, was replaced by a sparkling bell atop the company name. As Larry Higby, senior vice-president of marketing at Taco Bell, noted in Advertising Age, "Usually when you try to turn something around, you look to develop breakthrough advertising. But we came to exactly the opposite conclusion: we needed to look more mainstream."
The strategy worked. Taco Bell grew rapidly during the early 1980s. By 1983, when John E. Martin took over as president, the chain had 1,600 outlets in 47 U.S. states, producing a total of $918 million in sales. The average Taco Bell franchise claimed sales of $680,000 that year, a significant increase over the franchise average of $325,000 in sales only three years earlier. As a measure of market strength, Taco Bell's nearest rival in the Mexican fast food segment was Naugles, a California-based chain with only 160 outlets and 1983 sales of $84 million.
A 1985 advertising campaign typified the company's mainstream approach. The television spots stressed that Taco Bell offered the same ingredients as its burger rivals: beef, cheese, and tomatoes. It simply served the ingredients up in a different and, according to the company, more satisfying way. The campaign's tag-line, "Just Made for You," reminded consumers that more than 60 percent of Taco Bell products were custom-made and that no dish was prepared until it was ordered to ensure freshness. By 1986 Taco Bell had grown to 2,400 outlets with just over $1.4 billion in sales. Television advertising that year called Taco Bell "the cure for the common meal," a pointed allusion to the staple foods offered by its competitors.
New Taco Bell outlets were also different from earlier models. The traditional arched windows and red-tile roofs were retained, but with the addition of exterior stucco. Interiors featured skylights, silk plants, and light-colored wood. New dishes, such as seafood salads and grilled chicken, were added to menus, and drive-through windows became a standard feature.
The 1980s: Successful Pricing and Production Changes
In 1986, Taco Bell expanded overseas by opening a restaurant in London, England. Two years later, Taco Bell made widespread pricing and production changes. The resulting lower price of many of the items on the Taco Bell menu forced rival hamburger chains to follow suit. On the production side, Taco Bell began contracting out much of its food preparation, including the dicing and slicing of vegetables and the frying of taco shells, in order to get the kitchen out of the restaurant. Just-in-time inventory controls were added to all outlets, resulting in reduced overhead costs. Electronic information systems installed in all Taco Bell outlets cut down significantly on management paperwork. Staff responsibilities changed as well, as Taco Bell reversed the 70 percent kitchen and 30 percent dining room ratio in all its outlets. As Zane Leshner, the company's senior vice-president for operations, commented in Financial World in 1991: "We no longer dedicate an awful lot of labor and space to doing things that have no customer value at all."
The strategy paid dividends for Taco Bell. The streamlining steps enabled the Mexican fast food chain to raise its profits by 25 percent annually during the late 1980s at a time when it was sharply dropping its prices.
The company's success, coming when the late 1980s recession led to savage price-cutting and cutthroat competition in the fast food industry, impressed industry analysts. A 1991 article in the Harvard Business Review named Taco Bell as the best performer in the fast food industry at the time, surpassing traditional market leader McDonald's. The authors wrote, "If McDonald's is the epitome of the old industrialized service model, Taco Bell represents the new, redesigned model in many important respects."
To keep customers focused on Taco Bell's menu, the company in 1991 introduced a three-tiered value menu. Most products on the menu--from original tacos and bean burritos to cinnamon twists--would be sold at three main price levels: 59 cents, 79 cents, and 99 cents. In addition, new menu items introduced in 1991 included steak burritos to lure dinner customers and a test breakfast menu. These changes helped the company to achieve 60 percent more sales in 1991 than two years earlier.
Expansion in 1990s
New Taco Bell outlets were also being added to the company's stable. The number had grown from 2,193 units in 1985 to 3,273 in 1990, marking an annual growth rate of 8.3 percent. That growth rate continued in the early 1990s as Taco Bell opened some new franchises and many new company-owned restaurants. In 1992 Taco Bell opened outlets in Aruba, South Korea, and Saudi Arabia, bringing the number of international locations to 11. In the United States, Taco Bell pursued several unconventional approaches to expand opportunities for sales. In addition to opening new restaurants, the company introduced Taco Bell Express--small outlets with a limited menu and little or no seating--in airports, business cafeterias, and sports stadiums. Street carts took this idea a step further.
In addition, to take advantage of the growing take-home food market, Taco Bell forged agreements with supermarkets for counters within their stores. Although such counters created competition for the supermarket's own deli stands, the increased traffic through the store and the percentage the supermarkets got from the fast food sales was felt to offset any business stolen from delis. Taco Bell also entered the supermarket venue through a line of taco shells, salsa, and refried beans in 1993. In all, CEO John E. Martin hoped to have 250,000 distribution points by the next century.
However, this aggressive expansion raised the ire of many franchisees, who felt the new restaurants and outlets threatened their own sales. A comparison of Taco Bell Corp.'s profits and average sales growth per store seemed to validate the franchisees fears; between 1989 and 1992, the company's operating profits had grown by approximately $100 million, whereas average sales growth per store had fallen from about 16 percent to seven percent a year. Some franchisees also felt threatened by the company's move toward more company-owned stores. CEO Martin claimed that the problem stemmed from franchisees' unwillingness to change. "Sometimes you have to lead people kicking and screaming to the right answer," he explained to Amy Barrett of Business Week.
Parent company PepsiCo's attitude toward aggressive expansion reversed itself in the mid-1990s, however. Its hefty investment in new outlets and company-owned stores failed to provide an adequate return, especially when compared to its other core businesses. Its restaurants, including Taco Bell, had operating margins of seven percent, whereas its beverage division was seeing margins of 13 percent, and its snack division, 17 percent. The initial solution tried by Roger Enrico, the new chairman and CEO, was to reduce the percentage of outlets owned by the company, which stood at 60 percent in 1995. Rather than have company money tied up in capital, Taco Bell could rely on franchisee investment, a strategy followed by McDonald's, who owned only 20 percent of its restaurants in 1995.
Spinoff Planned in 1997
Still, this step did not satisfy PepsiCo's need for a greater return on its assets, and the company prepared to sell its restaurant division. In the late 1990s, PepsiCo drew together its restaurant businesses, including Pizza Hut, Taco Bell, and Kentucky Fried Chicken (KFC), placing them in a single division. All operations were now overseen by a single senior manager, and most back office operations, including payroll, data processing, and accounts payable, were combined. In January 1997 the company announced plans to spin off this restaurant division, creating an independent publicly traded company called Tricon Global Restaurants, Inc. The formal plan, approved by PepsiCo board of directors in August 1997, stipulated that each PepsiCo shareholder would receive one share of Tricon stock for every ten shares of PepsiCo stock owned. The plan also required Tricon to pay a one-time distribution of $4.5 billion at the time of the spinoff. If approved by the Securities and Exchange Commission, the spinoff would take place on October 6, 1997.
Enrico explained the move: "Our goal in taking these steps is to dramatically sharpen PepsiCo's focus. Our restaurant business has tremendous financial strength and a very bright future. However, given the distinctly different dynamics of restaurants and packaged goods, we believe all our businesses can better flourish with two separate and distinct managements and corporate structures."