Yum! Brands Wants a Bite Out of Chipotle

It turns out most burrito eaters aren't saying "yo quiero Taco Bell" these days.

Taco Bell, the first chain to take Mexican fast food national, has been struggling of late, left on the back burner as parent Yum! Brands (NYSE: YUM  ) focuses on expanding KFC and Pizza Hut in China. Meanwhile, 96% of Taco Bell restaurants are still in the United States. The chain is down 1,000 locations since 2000 but still contributes 60% of Yum! Brands' profits domestically.

Yum! does not provide financial results for its individual restaurant chains, but the company's domestic operating profit for the first nine months of 2011 dropped 20% over the previous year, largely because of a lawsuit alleging Taco Bell's meat was only 35% beef. The accusations were later withdrawn, but the chain is still feeling its effects.

The new school
While Taco Bell's been closing stores and attempting to recoup its brand image, the fast-casual Mexican segment has been booming. From 2007 to 2011, Chipotle's (NYSE: CMG  ) sales have more than doubled, and at company-owned locations of Jack in the Box's (Nasdaq: JACK  ) Qdoba they were up 58% from 2009 to 2011.

Taco Bell President Greg Creed sees Chipotle's rapid growth as creating a new market. "Chipotle is an opportunity, because what it's done has expanded the trial and usage of Mexican food," he said at an investor meeting in December. "It's got people to believe they can pay $8 for a bowl or a burrito." He also said he believes his company can make food "every bit as good as Chipotle" but charge less than $5. Creed has hired renowned chef Lorena Garcia to help develop a new set of menu items, known as the Cantina Bell menu, that will include Chipotle-style offerings such as black beans, cilantro rice, and corn salsa.

The rebranding experiment
Though the charges against Taco Bell proved untrue, its lasting consequences highlight the brand's underwhelming perception. Taco Bell's food is cheap, and the company has bombarded the airwaves for years with ads for its latest $0.99 offering. In industry-speak, it's positioned for value, as opposed to quality. That isn't necessarily a bad thing, but repositioning the brand to be a higher-quality restaurant like Chipotle will be a challenge.

The restaurant industry is full of failed rebranding attempts. Krispy Kreme (NYSE: KKD  ) , perhaps most famously, grew from a regional to a national brand and flooded supermarkets with its products, killing net income. After about five years of losses, the company finally returned to profitability in 2010. Its stock, near $50 in 2003, now trades around $7.

Yum! has succeeded in China with higher-end establishments that offer different menus from their American equivalents because their restaurants weren't a known quantity there, but Taco Bell has long solidified its brand in the minds of Americans. And when part of its game plan to revitalize sales includes a new menu item called the Doritos Locos Taco, I'm even more skeptical it can pull off a convincing Chipotle imitation.

Foolish final thoughts
Chipotle bears like to claim that the upstart burrito roller has no proprietary advantage over its competitors. But although recipes can't be patented, its rivals can't copy the unique qualities that give a brand its identity, and consumers know a pretender when they see one. Furthermore, selling burritos isn't like selling iPhone apps -- you need to open restaurants first, and you can't do that overnight. Therein lies Taco Bell's key advantage over other wannabes. With more than 5,000 locations domestically, Taco Bell has nearly triple the number of locations of Chipotle, Qdoba, and Baja Fresh combined. But a full-scale renovation of those stores would cost millions in new equipment and redesign work. For now, Taco Bell seems willing to go only halfway with the rebranding. Creed said, "I'm not trying to reposition Taco Bell to be Chipotle. To be more relevant, we can sell products that are every bit as good but cost a whole lot less."

With menu items like the Doritos Loco Taco, the taco 12-pack, and a $0.99 Beefy Crunch Burrito topped with Flaming Hot Fritos, Taco Bell's going to struggle to convince new customers that its food is the same quality as Chipotle or Qdoba's. Creed and company can try, but I'm betting they'll end up with melted cheese on their face.

While Taco Bell has its hands full in the United States, Yum! Brands' growth has been so explosive in China that our experts are calling it one of the "3 American Companies Set to Dominate the World." Find out what the other two are in their brand-new free report.

Fool contributor Jeremy Bowman owns shares of Chipotle but no other companies in this article. The Motley Fool owns, and Motley Fool newsletter services have recommended buying, shares of Chipotle Mexican Grill and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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