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    Why Del Taco is Thriving in Fast Food's Value War

  • A barbell strategy has been key to the Mexican's chain's impressive sales growth.

    Del Taco
    Platos are one of Del Taco's most successful higher-priced offerings.

    In the gauntlet that is value-driven marketing in quick service, Del Taco has prospered thanks to its barbell menu strategy. President and chief executive officer John D. Cappasola, Jr. said in a conference call that Del Taco’s pricing approach is igniting consumer demand without discounting margins, and enabling same-store sales growth despite the highly competitive environment.

    The results reflect that. Del Taco’s systemwide same-store sales growth of 2.4 percent in the fourth quarter marked 17 consecutive quarters of gains. Comps growth of 2.1 percent at company-operated units represented 22 straight positive quarters.

    For fiscal 2017, Del Taco’s same-store sales lifted 4.3 percent and 4 percent in the two categories, respectively, making it five consecutive years of growth. Total revenue was $471.5 million—a 4.3 percent increase from the prior-year period. Del Taco ended the quarter with 564 total restaurants (312 company owned).

    Essentially, the strategy refers to strong offers on each end of the spectrum, with mid-tier, recognizable items to connect the weights. Del Taco had a powerful tool to leverage this strategy in 2017—its Queso Blanco, which could be implemented into multiple items and multiple deals. For example, the new dollar Queso Chicken Roller helped Del Taco keep its popular Buck & Under platform top of mind for consumers, Cappasola said.

    Queso achieved more than 6 percent mix in Q4. At the same time, Del Taco featured two new Epic Burritos starting at $5 in November, designed to lift traffic and guest trade, he added. This increased Epic Burritos’ mix more than 8 percent. This menu combination balanced trends for Del Taco, especially as it lapped the 2016 Platos launch, its highest-priced platform. Del Taco saw positive traffic in December carry into Q1, proof the approach is resonating in a highly promotion environment.

    “I’m just scratching the surface at this point, product, news, across the barbell is not something we’re going to fall short on,” Cappasola said when asked about how Del Taco is bridging the gap in its strategy. “It’s a key strategic pillar for us and our marketing strategy. And we really set our teams up to constantly innovate. We just feel like, right now, if you look at our menu strategy, in totality, where we have the biggest opportunity to grow, is in that mid-tier area of the menu.”

    Here’s where Del Taco is going to gain ground in 2018, Cappasola said. Mid-tier menu expansion, similar to The Del Taco rollout, will hit markets side-by-side with the Buck & Under. He said there’s a signature new item close to launch that the company expects “will do very well for us.”

    Enhancements are coming to other platforms as well, such as nachos and Tostadas.

    What excites Del Taco management about this strategy is how it differs from the current, already successful platform. The company started 2018 with a strong focus on Buck & Under and a repositioning of its message to showcase the fact it features 15 items, including the new $1 Salsa Chicken Taco, and plans to continue adding variety moving forward. Mid-tier and premium limited-time offers are coming in the first half of 2018, Cappasola said. The return of Carnitas is one, expected in Q2. And returning to the mid-tier category, Del Taco said it expects to deliver several new products, “aimed to driving velocity” at price points between $1–$3.

    Another big change on the horizon is Del Taco’s plan to unroll its latest iteration of the Refresh Combined Solutions strategy. Later this year, the company will unveil what it’s calling “Elevated Combined Solutions.” This will include a series of brand catalysts and operational improvements, Cappasola said.

    It will start with a new advertising campaign focused on fresh prep. Del Taco will refresh all marketing communications and menus, add complementary new mid-tier and premium products, and rollout the anticipated Del Taco mobile app.

    The app, expected in the back half of 2018, will initially focus on establishing Del Taco’s customer relationship marketing capabilities, including the use of targeted promotional offers intended to drive incremental guest frequency.

    “Over time our platform can scale to a loyalty program that we view as a powerful marketing tool in both new and mature markets,” Cappasola said.

    Del Taco said its initial testing with third-party delivery companies has delivered significantly higher average checks. Early returns also point to incremental sales lift, Cappasola said. Del Taco plans to expand the test with GrubHub in Q2.

    Del Taco is preparing for the launch of Elevated Combined Solutions with Spring Leadership Academies, “followed by a focus on restaurant leadership and culture, training enhancements with an update to our e-learning platform and a focus on greater hospitality in our restaurants. Elevated Combined Solutions will be an internal rallying point for our brand and a catalyst to embed our brand position externally,” he said.

    On the development front, Del Taco opened nine company-operated restaurants in the fourth quarter and one franchised. It acquired a franchised unit in Southern California as well. Three corporate stores and one franchised slid back into 2018 due to construction delays. Even with the setbacks, Del Taco opened 23 restaurants in fiscal 2017, a substantial increase over 2016’s 13 openings.

    Del Taco signed a 12-unit franchise development agreement with an existing Michigan franchisee, it announced. The company expects to add more agreements in the Southeast and to open 25–28 new units total in fiscal 2018, including the carryovers.

    About 75 percent of growth will be in core Western markets, with the rest representing emerging growth, primarily in the Southeast.

    “As pleased as we are with our progress, we believe we're still in the early innings of our journey. Our focus is to further elevate our brand position by driving a deeper understanding of our quality and freshness attributes without losing our value and speed brand strengths,” Cappasola said.