Executive Summary
Del Taco is the 2nd largest Mexican QSR, positioned around a wide variety of better-quality food (use of fresh ingredients represents a competitive distinction) offered for reasonable prices with convenient drive-thru access. The menu of this regional chain (62% of system units are located in California) consists of fresh items prepared daily in-house with a wide variety of offerings (+22% more menu items than segment average) including: tacos; burritos; tortas (a sandwich stuffed with meat, cheese & toppings); quesadillas; rollers; nachos; crunchtadas; loaded fries; taco salads; and burgers & fries. Fresh as Del (made-to-order) positioning features freshly prepared: pico de gallo; grilled marinated carne chicken & asada; grated cheddar cheese; house-made guac; and slow-cooked beans made from scratch. While value/price represents a key equity as necessitated by the brand’s core lower-income target market, its barbell pricing strategy also reaches up to premium priced options. The chain’s 20 Under $2 value menu was launched during 1Q22 to contrast with competitors who moved away from value because of food cost inflation and this platform is profitable because it drives incremental, add-on sales. Value is also represented by: Taco Nights deals (leveraging the chain’s 24/7 late-night access); value promotions; and loyalty deals. Long-term sales drivers are represented by its: value leadership; menu innovation; digital transformation & brand engagement driven by a loyalty upgrade; and new remodel program which incorporates its access optimized Fresh Flex format. Having said all this, it is notable that Del Taco is the smallest chain in the $1B+ QSR sandwich segment (domestic systemwide sales = 7% of Taco Bell’s total) and system comps have underperformed the $1B+ QSR sandwich segment since 2018. An ongoing sales headwind is represented by the chain’s orientation towards a lower-income demo which has been disproportionately pressured by the current economic environment and this challenge is aggravated by the chain’s positioning in the high-cost California market which necessitate healthy menu price increases. In conclusion, while Del Taco enjoys strong concept fundamentals, the chain remains challenged to drive needed AUV growth especially at a time when its core low-income customers remain stressed by unfavorable economic conditions.
Order Report
