Why does Taco Bell need to grow?

Taco Bell executives feel significant pressure to find growth

opportunities. This comes from investors, who are looking for stock
gains, and from operators, who want to see strong store-level results.
One of the challenges for the Taco Bell leadership team is that the
brand has delivered strong results in recent years. This only increases
the pressure to continue the momentum.

How has Taco Bell grown in recent years?

Historically, Taco Bell has delivered exceptional results through
product innovation. The biggest growth driver in recent years has
been the Doritos Locos Tacos introduction. This line of products
created excitement. Loyal Taco Bell customers loved the new
products and infrequent users stopped by to try the items. Overall
the introduction led to a sharp jump in revenues.

Do you think Taco Bell should proceed with the breakfast launch?

There is a clear reason to proceed: breakfast is a major opportunity. It

makes up a large portion of the fast food industry and Taco Bell has no
presence. By adding a line of breakfast products, Taco Bell can
significantly increase profits. One of the reasons breakfast is so
appealing is that it involves little capital expenditures. The restaurants
already exist. Building the breakfast day part is simply a way to
maximize revenue and cash flow from the asset base. However, Taco
Bell failed in this space before and might fail again. The company faces
several significant hurdles.

The biggest challenge is that people have fairly set habits when it
comes to meal occasions, particularly with respect to breakfast. How
will Taco Bell get people to start thinking of Mexican food as a
breakfast option? It is important to note that this isn’t a category
building opportunity; people won’t start eating breakfast, or going out
to breakfast, now that Taco Bell has a line of breakfast products. If
Taco Bell is going to succeed, it has to convince people who currently
eat fast-food breakfasts (primarily at McDonald’s) to switch to Taco
Bell. This won’t be easy.

Another issue is that Taco Bell’s core customer may not be highly
breakfast-oriented. College students, for example, may not even be
awake in time for breakfast.

In addition, Taco Bell faces operational challenges. The only way Taco
Bell can offer breakfast is by serving relatively simple items that don’t
require new equipment. This will limit the chain to things like reheated
eggs and unsophisticated coffee drinks.
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 Taco Bell franchisees will absorb much of the risk, as the store owners
will need to open earlier and invest in new equipment. If the
franchisees lose confidence in the new introduction, they could cut
back the hours, essentially dooming the launch.

What Happened

Taco Bell launched its new breakfast line on March 27, 2014. It was
the largest menu expansion in the brand’s fifty-year history.

The first breakfast campaign set Taco Bell up as a direct rival of

McDonald’s, featuring people named Ronald McDonald enjoying Taco
Bell breakfast items such as the Waffle Taco. This campaign received
attention in the media for its confrontational approach.

Taco Bell’s second campaign, which launched April 8, sought to paint

McDonald’s as outdated. The campaign’s tagline, directed at
McDonald’s customers, was: “Get with the times.”

Taco Bell invested heavily in the launch. As Taco Bell CMO Chris Brandt
explained, “You will not miss Taco Bell breakfast.”

The breakfast line started strong. In the first week, a remarkable 22

percent of quick-serve restaurant breakfast customers made a
purchase from Taco Bell’s breakfast menu, and 49 percent of those
customers claimed intent to purchase again.

Chairman and CEO David Novak pointed to the breakfast line as a

growth driver, noting in an earnings release: “At Taco Bell, we’re
extremely pleased with restaurant margins of nearly 21 percent in the
quarter and the overall results of our breakfast offering, which has
given us a new growth platform to build upon in the years to come.”

Breakfast accounted for 6 percent of store sales by the end of 2014.

The company hoped to build this to 20 percent.

Taco Bell finished 2014 with positive results, in part due to the new
breakfast line.

Taco Bell 2014 Results

Restaurant count +2%
Same-store sales +3%
Sales growth +4%

Source: Yum! Brands, press release, “Yum! Brands Reports Full-Year

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EPS Growth of 4%, or $3.09 Per Share,” February 4, 2015.
Taco Bell started 2015 strong, with sales up 9 percent, driven by a 6
percent jump in same- store sales in the first quarter. Operating
profit increased by 37 percent.

The company continued to invest in the breakfast line. As a Yum! Brands

spokesman said, “We are far from done innovating in breakfast by a long
shot.”7 It rolled out a new campaign for Taco Bell breakfast in March
2015, positioning the company’s breakfast line as an act of defiance
against conformity. Set in a fictional land called “Routine Republic,” the
new marketing effort drew inspiration from the popular Hunger Games
book and movie series. Industry magazine Advertising Age called it “one
of the most unusual breakfast campaigns ever.”

Taco Bell also began evolving the breakfast line. In 2015, the company
dropped the Waffle Taco and introduced the Biscuit Taco, designed to
resonate with customers in the southeastern part of the United States.

New CEO Greg Creed (who replaced David Novak in January 2015)
commented on the breakfast line in a presentation to analysts in May
2015. He noted, “We’re very happy with the numbers . . . We’ve sort of
turned it into a two horse race between ourselves and McDonald’s. That
is really what we were trying to do.” He pointed out, “We didn’t have to
get people who were eating Kellogg’s Corn Flakes to come to Taco Bell.
We just had to get people who were going to our competitors to come to
us.” Creed stated that brands need to be “distinctive” and “disruptive” to
achieve success in today’s market. He believed that the breakfast outlook
was good, and he remarked, “I’m very bullish about breakfast at Taco
Bell.”

Learnings

 Growth is the core challenge facing management. This is true for

all organizations, not just Taco Bell.
 The pressure to grow never stops. Delivering strong growth
results in higher expectations.
 Building buying rate with current customers is a promising
opportunity. New usage occasions and day parts can be major
opportunities.
 Just because something failed once doesn’t mean it will fail again.