Will Taco Bell's Fast Casual Restaurant U.S. Taco Co. Be a Match for Chipotle?

While Yum Brands'  (NYSE: YUM  ) Taco Bell has been screaming from the rooftops that its new breakfast menu is an attempt to win market share from McDonald's  (NYSE: MCD  ) , the company took a quieter approach in its efforts to launch a new fast casual concept.

Taco Bell had a team of young executives working on creating a fast casual model in a "secret war room" at the chain's headquarters. The idea for the group came after "a segmentation study conducted on Taco Bell that revealed a fairly large demographic that was not likely to use quick-service (fast food) restaurants at all," Nation's Restaurant News reported.

"We realized that at Taco Bell we weren't reaching all of those who want Mexican food," Senior Brand Manager Jeff Jenkins told USA Today.

The new restaurant won't carry the Taco Bell name. Instead the eatery will be dubbed "U.S. Taco Co. and Urban Taproom" and the menu will look nothing like the gimmick-filled offerings at Taco Bell. That means no Doritos Loco Tacos, no Crunchwraps, and surprisingly no burritos.

Instead the new concept -- which is scheduled to open in Huntington Beach, Calif., this summer -- will have a simple menu with 10 "premium" tacos, thick fries (which can be topped in various ways), and shakes. Future locations will offer craft beer and wine but the first one will be alcohol-free.

Taco Bell CEO Greg Creed said that instead of spending millions attempting to lure customers unlikely to eat at Taco Bell into the chain, it made more sense to create a new concept that would "appeal to that demographic which includes an eclectic mix of generally higher-income foodies," NRN reported.

Basically it's a take on Taco Bell designed to appeal to foodies who would never set foot in a Taco Bell. A fancier version of Mexican food with higher prices for the millennial crowd that takes pride in choosing Target over Wal-Mart and fancier fast casual over fast food. 

Taking on Chipotle

While Taco Bell and Chipotle  (NYSE: CMG  ) are often linked as competitors and Taco Bell even added the higher-end Cantina Bell menu items as an answer to Chipotle's higher-quality product, the comparison may not be fair. Bell is a fast food or quick service restaurant while Chipotle is fast casual -- which generally means higher quality and higher prices.

Fast casual has been a growing success led by brands including Chipotle and Panera Bread (NASDAQ: PNRA  ) . If Taco Bell executives are right that fast casual customers aren't likely to eat at quick service restaurants, then Taco Bell and Chipotle may both offer Mexican food but they aren't really competing to sell it to the same people.

Fast casual is a rapidly growing segment and its appeal to Taco Bell is obvious -- new customers who spend a lot more money.

At U.S. Taco Co. "the average check will likely be around $11.50 to $12 with a drink. Tacos are priced at about $4 each, two for $7, or three for $10," NRN reported. "Taco Bell's average check is about $7.20."

Yum Brands isn't going upscale only in the taco world. It's also testing a fast casual take on KFC called KFC Eleven and another non-KFC-related take on chicken called Super Chix.

Both brands are healthy 

Taco Bell had a good 2013 -- specifically in the United States -- where the brand provided approximately two-thirds of Yum's U.S. profits. The chain has also reported eight consecutive quarters of U.S. same-store sales growth. Yum does not separate out sales for Taco Bell versus its sister brands Pizza Hut and KFC in its annual report, so exact sales figures are not available. 

Chipotle had a good year too with overall revenue growing 17.7% to $3.21 billion. 

Chipotle's sales figures are likely intriguing to Taco Bell executives, which could use them as a way to gauge market interest in fast casual Mexican. Still Yum should tread carefully. Chipotle is about more than its food as the company also has a carefully crafted reputation tied to its use of organic ingredients and generally caring about food quality.

Like Starbucks or Ben & Jerry's, Chipotle has a reputation as a company that cares about more than the bottom line. That builds customer loyalty and makes an assault on its market share more difficult -- specifically because no matter how well the connection is hidden, many consumers will know about the link between Bell and U.S. Taco Co.

Taco Bell has to try

Fast casual represents too big an opportunity for Yum to not take a shot. Opening one restaurant with plans for another should show the company if consumers want an upscale take on tacos from the people that brought you Taco Bell.

It's a curious decision to open the first U.S. Taco Co. and Urban Taproom and not include the alcohol part of the concept. Still the slow roll-out of a few stores should give Yum a chance to refine the concept and even build some buzz that the new chain is not the old one with a different look.

Consumers are willing to pay more for better food, and Yum is looking to profit. It'll also hedge the company's risk in case the public's tastes shift away from fast food.

The biggest negative going against U.S. Taco is Taco Bell, but that's not an insurmountable problem. It might even be an advantage if the new concept is seen as a step-up brand for Bell's loyal customers. Grab a Waffle Taco for breakfast or a Crunch Wrap for a quick lunch but if you want something a little fancier in a nicer restaurant maybe washed down with a craft beer, come to U.S. Taco Co.

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