Del Taco Leans on Innovation to Navigate New Challenges

    A fresh loyalty program and design has the brand looking ahead.

    Fast Casual | October 15, 2021 | Suzanne Blake
    Del Taco drive-thru prototype.
    Del Taco
    Del Taco's Fresh Flex design is built for an omnichannel world.

    The way through industry-wide staffing and cost challenges lies in innovation for Del Taco, the company said Thursday. That means new menu offerings and a freshly unleashed loyalty app called “Del Yeah! Rewards.” Additionally, a revamped store model with potential to scale.

    Same-store sales grew 1.8 percent over the prior year in Q3. This consisted of a 2 percent hike at franchise restaurants and a 1.6 percent jump at company units. Compared to 2019, company sales lifted low single digits while franchise restaurants grew in the high single digits, said Del Taco CEO John Cappasola.

    “Our third-quarter performance was in line with our expectations, which I would characterize as a good outcome particularly in light of well-known cost pressures across the restaurant industry,” Cappasola said.

    The key deviation in franchise and company store sales growth was tied to geographies. Corporate restaurants tend to be in California, while franchisees have often led the brand’s foray into non-West Coast markets. California witnessed the brunt of labor challenges and cost increases for restaurants while also being one of the later markets to begin economic recovery from COVID-19. The primarily non-California Del Taco franchises grew around 10 percent in same-store sales compared to 2019, while California improved at roughly 4.6 percent.

    “The main driver of inflation is California and Nevada minimum wages,” Del Taco CFO Steve Brake says. “It's working against us. I would say the operational efficiency has been very good at the restaurant level. So that's been a positive: operators are executing that very well.”

    While Del Taco is only four weeks into its Del Yeah! Rewards system, Cappasola said the brand is already seeing strong directional trends. Unique active users are already performing at a similar level as Del Taco’s old app in the first month, and this is all before the migration of users from old app to new app is complete. Nearly 40 percent of the nearly 250,000 Del Yeah! Rewards users are new members altogether.

    Del Yeah! allows users to unlock offers, rewards, and experiences that increase with continued usage of the app. It also enables the brand to use customer data to drive personalized, higher value experiences for guests.

    Del Taco achieved same-store sales growth in both Q3 and Q4 of 2020 as it rolled out one of its most successful product launches in history: the Crispy Chicken Taco. Now, Del Taco has new menu cards to play—the Stuffed Quesadilla Tacos and Double Cheese Breakfast Tacos. The Stuffed Quesadilla Tacos add a creamy Queso Blanco folded into the shape of a taco shell and is stuffed with grilled chicken, carne asada steak or crispy chicken with guacamole as an add-on. The menu addition saw strong consumer demand, mixing over 6 percent of sales so far.

    And in November, Del Taco will begin its limited-time holiday Tamales offering, made with shredded pork and a fire roasted salsa. Cappasola expects to end 2021 with six consecutive quarters of comps growth.

    “Overall, we feel good about the trend and the programs that we launched recently,” Cappasola said. “And we think they're going a long way in helping us continue to drive same store sales growth.”

    One area where Del Taco continues to see an uptick in activity is in delivery orders. Both company and franchise delivery were north of 7 percent during Q3 even alongside Del Taco’s decision to increase the menu price premium for delivery.

    Del Taco also partnered with REEF to launch several delivery-only kitchens across the country. The first outlet will open later this month in Los Angeles.

    “The purpose here is to expand access to the brand, particularly in dense areas where there's a lot of guests and occasions that we're just not servicing today,” Brake said. “So we're excited about that.”

    Del Taco has been paying higher wages at some hotspot restaurants. That and the impact of overtime drove average wages up this year. Labor and related expenses as a percentage of company restaurant sales increased 80 basis points to 33.2 percent from 32.4 percent. Some stores required the company to reduce operating hours, and menu pricing leapt about 5 percent.

    “The entire industry is feeling the impact of labor staffing challenges and we are no exception,” Cappasola said. “For certain restaurants with labor availability challenges, we selectively increase wages and in some cases, temporarily closed dining rooms or limit our late night and early morning hours of operation.”

    But Cappasola says Del Taco saw some of the labor pressure come down in recent weeks.

    “It remains very fluid,” Cappasola said. “It's hard to predict exactly what's going to happen, but I'll say we've got a very holistic strategy in regards to how we're thinking about both acquiring quality talent as well as keeping quality talent and making sure that we're training and developing them. Overall I think our operators and our franchisees are just doing an outstanding job leading in this environment with our people-first focus and navigating a very challenging time.”

    Del Taco has already noticed an improvement in applicant flow coming into its system. This is likely attributed to a digital recruitment campaign Del Taco invested in where the company has the ability to target based on zip code, and put extra money into stores that need more help. In all, it improved the applicant pool by four times over the last several weeks, Cappasola said.

    “Those quality applicants coming into the system, that's step one for these hotspot restaurants,” he said. “Then getting those folks trained properly and developed properly to create great guest experiences, that's step two. But certainly, we've seen some of these hotspot restaurants start to return back to more normalized operating hours, I should say, in recent weeks.”

    On the retention side, Cappasola said Del Taco shows appreciation for employees with daily pay initiatives, free meals, and doubled referral bonuses along with events like Employee Appreciation Month.

    Moving into the next quarter and year, Del Taco has room to grow, the company said, especially with a Fresh Flex prototype that launched earlier in the year. The design reconceptualized stores for maximum worker efficiency and guest convenience. It includes contactless third-party delivery pickup stations, double drive-thru lanes for mobile orders or delivery driver pickups, and dedicated parking lot areas for those who want to pull in, eat, and go. Del Taco is on track to complete up to 20 company store remodels this year and expects to continue the effort in 2022.

    With the new design in tow, Del Taco signed deals for 53 units this year, which will come to fruition over the next two calendars, coast to coast. New locations include central Florida; Raleigh-Durham, North Carolina; Fresno, California, and nontraditional casino units in Las Vegas.

    These deals will enable Del Taco to deliver 5 percent systemwide new unit growth led by franchising beginning in 2023, executives said.

    “We are absolutely taking a quality over quantity type of an approach with these groups,” Cappasola said. “We need to execute. We need to deliver the brand, and we need to give our new partners that support for them to be able to get to that next level of growth.”

    During Q3, Del Taco opened one company and three franchise restaurants while closing one company and one franchise restaurants, ending at a total of 603 stores. Over the entire year, franchisees opened eight new restaurants while the company debuted three. The fourth and final 2021 company opening will be the first Fresh Flex prototype in Del Taco’s new Orlando seed market.

    Total revenue increased 2.9 percent to $124.3 million from $120.8 million during the third quarter. This comprised company restaurant sales which were up by 2.2 percent to $112 million and franchise revenue up 8.1 percent year-over-year to $5.6 million. Through the first five weeks of Q4, company stores were up around 3 percent in same store sales and franchise restaurants gained more than 4 percent.