With its latest move into the fast-casual market, Taco Bell has taken a page from the playbook of KFC, another Yum! Brands (NYSE:YUM) company. Taco Bell appears interested in increasing its price points and attracting wealthier customers, as it previously rolled out the more upscale, health-oriented Cantina Bell menu at its regular restaurants.
After that, KFC created its own fast-casual concept, KFC eleven. Then it created another new concept, Super Chix, the home of "the last true chicken sandwich." Now Taco Bell has a fast-casual concept of its own, which will carry a new brand name as well. Should other restaurants be worried?
Upscale, not health-oriented
The items on the new concept's menu seem designed to fill up its customers instead of helping them keep the weight off. The menu includes thick steak fries, tacos with Southern gravy, and milkshakes that contain beer. It looks like Taco Bell does not plan to compete against the strong health-oriented brand of Chipotle Mexican Grill (NYSE:CMG) with this concept. However, Taco Bell just made one move that parallels the strategy of Chipotle; this new concept will sell alcohol, although the first store didn't get an alcohol license. Chipotle sells beer and margaritas, and other fast-casual chains also sell alcoholic beverages, but alcohol isn't available at many quick-service chains. Alcohol can boost sales and margins for restaurants, although it can detract from the family friendly image that many quick-service chains want.
The decision to launch the new concept without the Taco Bell name shows that fast-casual concepts have clearly established a reputation for better food quality than quick-service restaurants in the minds of the public, and that Yum! Brands wants to capitalize on this. This is definitely true for Chipotle, which is why I think the market made a mistake by selling off the stock when the restaurant announced that it planned to raise its prices, right after Chipotle posted very strong comps for the quarter. In fact, Taco Bell even conducted an internal survey that concluded that many diners prefer not to eat at quick-service restaurants, which was why it created an entirely new fast-casual concept.
Taco Bell's survey could be bad news for other major quick-serve chains, like McDonald's and Burger King. The decision to leave out the Taco Bell brand provides further evidence that parent company Yum! Brands has shifted its strategy. Yum! also left out the KFC name when it created the Super Chix concept. The brands of quick-service chains may have lost some value among wealthier customers, although they can still attract diners looking for deals on meals.
When a restaurant operates multiple concepts, problems at one concept have less of an impact on the company as a whole, but managing multiple concepts simultaneously can be challenging. Yum! Brands owns three major concepts now, but it used to have five; the chain decided to sell off Long John Silver's and A&W back in 2011. Yum! Brands wanted concepts that it could build out all over the world, which it has been doing with Pizza Hut and KFC. Yum! Brands also thinks that Taco Bell has international growth opportunities in India. Chipotle has also been working on Asian and pizza-focused concepts. However, unlike the restaurants that Yum! Brands sold, the U.S. Taco Co. and Urban Tap Room doesn't seem like a case of diworsification. The new concept is still a taco chain, even if it uses higher-quality ingredients than Taco Bell does and its interior looks a lot more like the interior of a Chipotle restaurant.
It's much too early to say whether the new Taco Bell concept will get any traction, so the fast-casual chains don't need to be worried. Probably the most important takeaway here is that Taco Bell has admitted that diners see its main brand as low-end. This isn't necessarily bad for the company, as it still has unique items like Doritos Locos Tacos and Mountain Dew Baja Blast (which are both PepsiCo brands; the soda and snack maker once owned Taco Bell as well) for diners on a budget. This move also shows that Taco Bell can keep coming up with new ideas, which is also evident from its new breakfast menu. With this willingness to experiment, Taco Bell will remain a strong competitor in the quick-serve market whether or not its new concept succeeds.
Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and PepsiCo. 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.
More from The Motley Fool
How to Invest in KFC Stock
To own a piece of this growing restaurant chain, investors need to buy Yum! Brands, its corporate parent.
8 Metrics Highlight Yum! Brands Inc.'s Impressive 3rd Quarter
Yum! Brands' results last week sent the stock sharply higher. Here are the metrics behind the quarter's solid performance.
Yum! Brands Inc. (YUM) Q3 2017 Earnings Conference Call Transcript
YUM earnings call for the period ending September 30, 2017.