Is Taco Bell About to Take a Bite Out of Chipotle?

With the high-end U.S. Taco Co. and Urban Taproom, Yum! Brands is going after Chipotle's business. Will the new venture be a success?

May 1, 2014 at 12:15PM

With over 40,000 locations, comprised of Taco Bell, KFC, and Pizza Hut, Yum! Brands (NYSE:YUM) is a global fast-food powerhouse. Two years ago, Yum's Taco Bell franchise attempted to rebrand itself to compete with upscale burrito giant Chipotle (NYSE:CMG), with little success. Taco Bell recently announced an upcoming launch of a higher-end concept, U.S. Taco Co. and Urban Taproom. Will Yum! finally take a bite out of Chipotle?

Chipotle and Taco Bell: A brief history
Before we discuss the company's new concept, it's worth recalling Yum!'s previous attempt to challenge Chipotle. 

In 2012, through its "Catina Bell" menu, Yum! (via Taco Bell) attempted to launch a healthier product, at a reasonable price. On the surface that idea sounded plausible enough, and the move even prompted a famous short-call of Chipotle by billionaire David Einhorn. The idea didn't work, however, as it turns out Chipotle's customers are not price driven. Most weren't looking for a slightly cheaper version of Chipotle if it meant they had to sacrifice quality. In response to a question about Cantina Bell on a conference call, Chipotle Founder Steve Ells put it best when he said: "Our customers don't want 'grilled chicken' from restaurants that don't have knives, grills, or a cutting board."

Since Taco Bell launched Cantina Bell, Chipotle's sales, and stock price, have been on a nearly straight line upward. 

CMG Chart

CMG data by YCharts.

But after seeing the results, Taco Bell quickly adjusted in solid fashion. After the weak response to the Cantina Bell menu, it retooled its brand strategy. Taco Bell went back to its core brand message of affordable guilty pleasures, enjoyed most by teenagers and young adults. Taco Bell came through with the Doritos Locos Taco line, with over 300 million sales in its first eight months, and they've introduced new versions to similar success. Their breakfast menu has been well received by customers, and their new brand message of "Tacos and burritos all day and late night" resonates with their fan base. In short, they realized they needed to stay focused on the customers they already have, rather than Chipotle's customers, and it's worked. 

Taco Bell is firing on all cylinders again; will U.S. Taco Co. be another unnecessary distraction?


Source: Taco Bell.

U.S. Taco Co. and Urban Taproom will not kill Chipotle... or Yum!
I do not think that U.S. Taco Co. and Urban Taproom will help Yum! Brand's conquer Chipotle. The concept is not Mexican; rather, it's an American-themed taco bar that will server "premium tacos, thick-cut fries and shakes." Not only will it not "kill" Chipotle because it's purposefully different, it's also not the first to try this. Qdoba, for instance, is essentially a Chipotle copycat and it's struggled mightily, posting negative comparable sales last quarter. 

There are many independently owned taco bars, mom-and-pop Shops, that hip "foodies" frequent, and they haven't hurt Chipotle. Yum!'s management has specifically noted that U.S. Taco Co. will be targeting these "foodies," but I think they may be underestimating how fiercely independent that audience is. In my opinion, the foodies are "independent" enough to do a little research and avoid a taco bar simply because it's owned by Yum! Brands. 

The most important thing, though, is that regardless of this venture's success or failure, it won't damage Yum!. When the Cantina Bell menu was first announced, with heavy marketing by Chef Lorena Garcia, I was worried that Taco Bell was losing its focus. Taco Bell has an edge on most of the fast-food world because the typical burger chains don't offer a similar product. By refocusing its brand strategy, it's given its valuable customers exactly what they want and it's stayed on-message. Meanwhile, Yum! has realized that the only way to target the higher-end market, albeit a long shot, is to move that strategy away from their fast-food brands. That's a much better plan.

Yum! Brands is firing on all cylinders, so is Chipotle, and U.S. Taco Co. (thankfully) won't hurt, either.

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Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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