Could This Strategy Be Taco Bell’s Chipotle Killer?

It seems there's always a company looking to reinvent itself and connect better with its customers. Sometimes it works and sometimes it doesn't. The latest company to really shake up its image is Taco Bell, owned by Yum! Brands (NYSE: YUM  ) .

First, the restaurant chain sought to reinvent itself with Doritos Locos Tacos and the Cantina Bell menu, and most recently it introduced a breakfast menu. Now the company has gone full circle and is introducing a new, more upscale concept called U.S. Taco Co. and Urban Taproom. This comes as its Cantina Bell menu failed to be the Chipotle Mexican Grill (NYSE: CMG  ) killer that billionaire David Einhorn thought it would be. Could U.S. Taco Co. and Urban Taproom finally be the answer for Yum! Brands to compete with Chipotle Mexican Grill?

Source: Nation's Restaurant News

Taco Bell remains a value proposition
Taco Bell executives have realized that they cannot get their core customers to trade up. Taco Bell customers prefer great food at a reasonable price. The average guest check at Taco Bell is about $7, while the average check at U.S. Taco Co. will be around $11.50 to $12. U.S. Taco Co. and Urban Taproom will be targeting customers who would ordinarily go to Chipotle Mexican Grill and not Taco Bell.

This value proposition is what hedge fund manager David Einhorn did not foresee when he made his short bet on Chipotle shares. His thesis was based on Taco Bell's Cantina Bell menu capturing business from Chipotle. That did not happen, as Chipotle customers remained loyal to the brand and willing to pay more for Chipotle's menu items.

For David Einhorn, this was a costly bet, as he initiated his short position at around $350 a share and instead shares surpassed $600. He threw in the towel and closed his short position in the first quarter, which resulted in a 33% loss for investors in Greenlight Capital.

How will U.S. Taco Co. and Urban Taproom be different?
The first location will open this summer in Huntington Beach, CA. The menu will feature 10 premium tacos, thick-cut French fries, milkshakes, and eventually beer and wine. There will also be shakes spiked with beer, such as the "Mexican Car Bomb," which will feature vanilla ice cream, tequila caramel sauce, chocolate flakes, and Guinness Stout.

Source: Nation's Restaurant News

Where U.S. Taco Co. will look to differentiate itself is with its focus on the taco rather than the burrito. The plan is for U.S. Taco Co. to do for the taco what Chipotle did for the burrito. The company plans on doing this by taking inspiration from the food-truck scene that has emerged in many U.S. cities. These food trucks are combining unique flavors to create great dishes with a loyal following wherever the food trucks go.

While Taco Bell is Mexican inspired, U.S. Taco Co. will be American inspired. The menu will include items such as the "Brotherly Love," a version of the Philly Cheesesteak. There will also the "Winner Winner," which features Southern-style fried chicken breast, and the "One Percenter," which features fresh lobster.

Source: Nation's Restaurant News

The other key difference between U.S. Taco Co. and Chipotle is that customers will order at a counter and not get to make their own tacos. The dishes will be prepared in glass-enclosed kitchens, allowing customers to watch the meat being grilled and the tacos being made.

It'll still be tough catching up to Chipotle
While many restaurants aspire to be the next Chipotle, it's even tougher to actually beat Chipotle in terms of sales growth. Chipotle's comparable sales rose 13.4% in the first quarter. This year, Chipotle plans to open 180 to 195 new restaurants. On the other hand, Taco Bell's comparable sales fell 1% in its latest quarter.

How do shares compare?

 

Market Cap

Forward P/E

1 Year Return

Dividend Yield

Yum! Brands

$34.01B

18.2

14.85%

1.9%

Chipotle Mexican Grill

$15.78B

31.9

40.33%

N/A

Source: Yahoo! Finance

Foolish final thoughts
U.S. Taco Co. and Urban Taproom is a unique concept with great potential in my opinion. Taco Bell CEO Greg Creed pretty much summed it up with what he told Nation's Restaurant News:

We're going to open a restaurant and see what happens. I'd love to see 1,000 to 1,500 of these, but let's not get ahead of ourselves.

While it's far too early to call U.S. Taco Co. and Urban Taproom a competitor to Chipotle Mexican Grill, I have to give credit to Yum! Brands and its executive team for continually looking for ways to innovate.

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