Del Taco’s Performance Lays Groundwork for Innovative Store Designs

Del Taco had boxes to check while navigating the treacherous COVID-19 waters, and the restaurant came ready with its black ballpoint pen.

The chain delivered value through its Del’s Dollar Deals, which attracted heavy quick-service users and drove incremental sales. The brand successfully rolled out innovation along its barbell menu via the Crispy Chicken, Epic Burrito, and guacamole.

Del Taco pushed brand engagement through “reverent and humorous-branded content” across social and digital channels, such as satirical metal band, “CRYS///P TYGER,” introducing the Cholula Crispy Chicken Taco in October. It leaned into the digital side of business, propelling the app to more than 1.2 million users, or a 38 percent increase compared to the end of 2019. The restaurant also met the demand for convenience, with delivery now accounting for more than 6 percent of systemwide sales in Q3 and company-operated delivery check average standing at 1.85 times the at-restaurant average.

CEO John Cappasola considered it a mission accomplished. In Q3, same-store sales rose 4.1 percent systemwide, breaking out to a 6.5 percent increase at franchises and a 2 percent lift at company-owned units. Revenue crept upward 0.5 percent to $120.8 million and adjusted EBITDA rose to $15.3 million, an improvement from $14.5 million last year.

“Our business has recovered and is now stable,” Cappasola said during the company’s Q3 earnings call. “Our franchisees are healthy and our balance sheet is in great shape. This allows us to invest in our future, and we intend to reach the other side of the COVID crisis, better positioned to capitalize on new opportunities.”

The availability of real estate combined with increased interest in drive-thrus from franchisees presents one of the biggest opportunities.

Del Taco is in the final stages of developing a new prototype that’s drive-thru only and features a smaller footprint. Cappasola said the model includes a modernized design and improved functionality that will “refresh the brand and position us well for growth in the future.” Because of its size, the CEO said Del Taco will have access to more real estate and conversion opportunities that it wouldn’t typically have with a standard drive-thru. That in turn should lead to more growth for franchisees, Cappasola noted.

“We're excited about it,” Cappasola said. “And the additional functionality we've added now, given the pandemic and COVID and some of the things that we see moving forward, like the ability to improve throughput as well as pickup at the restaurant level, those things have been integrated along with some smart strategies around the kitchen, that makes that kitchen more scalable to multiple menu of venues ideas that we have like drive-thru-only type of venues that lean into drive-thru and mobile pickup.”

The chain is also undergoing a test remodel program that’s bringing positive results. Del Taco completed four remodels by the end of 2019, and Cappasola said the brand came into 2020 trying to “understand the impact of various consumer-facing elements.”

COVID paused those plans for a few months, but the tests are now back on track and more remodels are coming in Q4. This time around, Del Taco will work to streamline costs, minimize downtime, and optimize those consumer-facing elements.

And then in 2021, Cappasola said the brand will take those new learnings and complete more remodels. If all goes well, Del Taco will take more of a systemwide approach entering 2022.

“We continue to believe that remodel strategy is very promising and it should be a really good use of capital to drive sustainable revenue growth and returns among the fleet, not to mention just improving the guest experience with the brand,” Cappasola said. “So we are continuing to refine and test remodel as we speak. … In general, we view success as AUV growth in the double-digit area. So that's what we're targeting.”

Del Taco

The brand plans to test curbside pickup and create a more holistic CRM platform to further digitize the business.

Del Taco ended Q3 with 596 units—295 company-owned locations and 301 franchises. In the quarter, one corporate store and four franchises opened. The brand expects to open two more franchises in Q4, including the first in Ohio.

Through the first five weeks of Q4, comps are up in the low-single digits with franchises performing positively and company-stores trending into the red.

Cappasola gave several reasons for this dynamic. He first explained that franchisees are spread across geographical regions while the company stores are concentrated mainly in Southern California and Las Vegas, which have been hit hard by the pandemic.

The CEO also said Del Taco delayed its fall price increase to November to “further read the consumer and just to determine the appropriate strategy for 2021, with the key there as to maximize flow through.” Stores are also competing with the launch of the premium Carnitas LTO in September 2019, which drove high average checks. This year, the brand is utilizing the $1 and $5 value Crispy Chicken program to drive transactions. Cappasola said one must also consider disruption of the breakfast daypart, especially with Del Taco lapping the launch of the Breakfast Toast Wrap last year.

However, Cappasola said transaction volumes and comps have improved since the launch of Crispy Chicken, and Del Taco is maintaining those increases. That trajectory should continue with more Crispy Chicken news and a normalized advertising spend. Additionally, the company is planning to launch a Tamale LTO, which will be on the premium side.

Company dining rooms remain closed, but Cappasola noted Del Taco has been able to make up for lost dine-in sales through the performance of its off-premises business.

The restaurant plans to address that even further in 2021 by placing employees outside near the drive-thru lanes to enhance throughput at high-volume stores. The chain wants to also leverage the performance of its delivery channels and app to test curbside pickup and develop more bundles to grow its share of party-size occasions.

Wading further into digital waters, Del Taco is also envisioning a more holistic CRM platform. The brand created a vice president of marketing technology position and appointed Erin Levzow to execute the strategy.

“Our brand positioning is exactly what the consumer is looking for these days-fresh flavorful food, great value, and of course, convenience,” Cappasola said. “And we can provide these relevant attributes through the limited and no-contact channels.”