Del Taco Aims to Recapture Value Positioning

    The strategy will be complemented by premium menu innovation.

    Finance | March 2020 | Ben Coley

    Del Taco

    In 2020, Del Taco plans to open 15 to 20 restaurants, including five company-owned store.

    Del Taco is entering 2020 with a focus on reigniting value through its new Del’s Dollar Deals Menu.

    The value-based menu, introduced at the end of January, features 79-cent tacos, quesadillas, chicken rollers, and nachos, $1 burritos, and 69-cent drinks and desserts. One of the menu’s goals is to reverse negative trends caused by ineffective mid-tier value promotions in 2019.

    Before the menu’s roll out, the Buck & Under Menu was the primary value platform, but CEO John Cappasola said its effectiveness withered as prices rose and focus switched in the past year from new product news to mid-tier value and premium messaging.

    Since the Dollar Deals Menu launch, Cappasola said, transaction, average check, and menu mix are trending similarly to the successful roll out of the Buck & Under menu seven years ago.

    “Historically, the price/value tier of our menu has been the foundation of our barbell menu strategy to help drive strong value and affordability perceptions, which are key drivers of heavy [quick-service restaurant] user frequency,” said Cappasola during the company’s Q4 and annual review. “Our ability to deliver a variety of lower-priced products featuring fresh ingredients is what makes Del Taco's [quick-service restaurant]-plus value proposition so powerful.”

    “ ... [The Del’s Dollar Deals Menu] is designed to stimulate trial and frequency with a modest check average and margin impact since many guests use the menu as an add-on,” he added.

    The Del’s Dollar Deals Menu and legacy Buck & Change menu have mixed 24 percent compared to a 19 percent mix from the legacy Buck & Under and Buck & Change menus.

    The new value platform will be complemented by premium product innovation to stimulate average check and improve transaction growth.

    At the end of February, Del Taco brought back its Jumbo Shrimp for Lenten season. In the spring, the chain will launch freshly prepared guacamole as a side order along with the relaunch of the Epic Burrito platform.

    “It's a great way for us to flex that barbell and reinforce that [quick-service restaurant]-plus position,” Cappasola said. “ ... We'll merchandize and offer [guacamole] as a way to modify products on the menu, as well. So I think about it as what we have done in the past with things like slices of avocados and Queso Blanco, you'll be able to add fresh guac to any product on the menu, and operations will be very focused on that. We haven't quite nailed down pricing on the modification piece yet. We'll get to that here shortly. But we do expect the Epic lineup will start at a great value of around $5 when we launch in the mid-spring to late spring time frame.”

    Del Taco

    While new value and product innovation are meant to drive transactions, Del Taco is investing in digital initiatives and daypart strategies to improve traffic.

    In 2019, systemwide same-store sales increased 0.9 percent, the chain’s seventh straight year of growth. That breaks out to a 1.3-percent lift at franchises and 0.5-percent uptick at corporate stores. In Q4, systemwide and company-operated comp sales rose 0.4 percent, while franchises grew 0.5 percent in the quarter. Corporate same-store sales in Q4 consisted of a 4.1 percent rise in average check, with modest menu mix growth, offset by a 3.7-percent drop in transactions. Del Taco attributes the negative transaction trends to slower heavy user frequency caused by an ineffective value platform.

    Revenue in 2019 rose 1.5 percent to $513 million, while in Q4 revenue decreased from $157.3 million to $157.1 million. Twenty-four stores opened in 2019 (10 corporate units and 14 franchises) and eight stores closed (five corporate units and three franchises). Del Taco refranchised 31 restaurants across Reno, Nevada, and Southern California markets.

    To increase same-store sales and manage margins, the chain will carry menu price of at least 4 percent in 2020. Menu merchandising and promotions will also be skewed toward items with favorable margin profiles.

    While new value and product innovation are meant to drive transactions, Del Taco is investing in digital initiatives and daypart strategies to improve traffic.

    The Del Taco app has about 950,000 members, and the brand plans to continue personalizing offers and enhancing its CRM capabilities to drive engagement. In addition, Del Taco has seen strong results at breakfast, thanks in part to the $2 Breakfast Toast Wrap that launched in the fall. In Q4, breakfast was the top performer in terms of comp sales and transactions, and that trend is the same thus far in Q1.

    In 2019, the brand integrated with Grubhub, Postmates, and DoorDash, and each were fully launched at company-owned stores in December. Cappasola said delivery carries a significantly higher check than in-restaurant. To date, delivery represents about 3 percent of sales.

    “We feel very good about being able to over the course of the year work that check back into a more typical healthy level that we historically run,” Cappasola said. “And at the same time, obviously, it's all about execution and further innovation and product development and further embedding Del's Dollar Deals with the guest to make sure that traffic continues to accelerate. So, very happy thus far.”

    Cappasola said the company hasn’t seen any impact from the coronavirus yet in sales or the supply chain. The company has increased the frequency of cleaning, mandated that cashiers wear gloves, and moved lemons, sauces, and unwrapped utensils to behind the counter. Del Taco is also reemphasizing drive-thru and delivery procedures in case customers move toward those channels.

    In 2020, Del Taco plans to open 15 to 20 restaurants, including five company-owned stores, and a 1 percent closure rate. The brand has identified Orlando, Florida, as a long-term growth area. It expects comp sales growth in the low single digits and revenue between $503 million and $513 million.

    “We are squarely focused on growing transactions with the heavy [quick-service restaurant] user by dramatically strengthening our value proposition through Del's Dollar Deals, and we are encouraged by its early performance,” Cappasola said. “The new value platform, along with our key topline driving strategies that I outlined, will be supported with strong operational execution and will also serve to improve margin performance during 2020.”