How Taco Bell Became 2020's Top Franchise
Taco Bell endured years of falling sales without ever letting the struggle show, and the effort paid off: The master of hype finally scored #1 on our Franchise 500 list.
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On a hot August Saturday in 2019, less than a week into his new job as CEO of Taco Bell Corporation, Mark King started driving east from his office in Irvine, Calif. He was headed not for the border but for "The Bell" — the brand's four-day takeover of the V Palm Springs, a chic hotel about an hour away. All 70 rooms had sold out within minutes, booked by superfans dreaming of floating on pool rafts shaped like hot-sauce packets while sipping spiked Mountain Dew Baja Blast slushies in plush Taco Bell robes.
As King cruised down Highway 10, he still wasn't sure what to expect from the 57-year-old brand he'd just signed up to run. He understood the power of corporate excitement — he'd turned TaylorMade into the world's most profitable golf company and tripled sales as president of Adidas North America. But he'd never worked in fast food or franchising, and he didn't yet have a handle on what made Taco Bell tick. His 25-year-old daughter, a marketing professional, told him Taco Bell was one of the truly fun brands. Its culture was legendary and its connection with customers unrivaled. But King didn't fully appreciate what she meant — not until he arrived at The Bell, anyway. By the time his head hit the Fire Sauce packet pillow, he had a Taco Bell logo shaved into the side of his trim gray haircut.
"I definitely got taken by the moment of Taco Bell," King says, laughing. It wasn't the look he imagined for his first-ever presentation the following week to the board of directors of parent company Yum! Brands. But the buzzed-in logo went over great with colleagues. " From then on, I've loved this brand," he says.
Chalk it up to the everlasting appeal of Taco Bell stunts. For decades, the fast-food franchise has deployed masterful marketing campaigns to win customers. There was the time it promised free tacos to every person in the U.S. if the Mir space station could hit a 40-by-40-foot floating target in the South Pacific upon reentry. (It didn't, but we believed!) And when Taco Bell heard the locals in Bethel, Alaska, had been duped by a rumor that Taco Bell was finally opening in their town, the franchise helicoptered in a taco truck carrying 10,000 Doritos Locos Tacos. And of course, it also produces a steady stream of news-making new dishes — like French Toast Chalupas and Kit Kat Chocoladillas — that might as well be marketing stunts all their own.
On the strength of all this, the franchise cultivated a committed fan base that skews younger, hipper, and more creative — the exact type you'd expect to show up for a resort takeover. They come to the brand not just for tasty, cheap chalupas but for a good time. And they trust the brand to provide it.
"They're not afraid to wear a Taco Bell hat or shirt — you may not see that with all the other QSR brands out there," says Dennis Geiger, franchise equity research analyst and executive director at the Union Bank of Switzerland (UBS). "They say it's a brand that's always centered on being 25. Because when you're 16, you want to be 25, and when you're 45, you want to be 25. I think that kind of sums up what the brand is going for."
But even while projecting a youthful facade, the brand had to do a lot of growing up before reaching this moment — its first-ever appearance at the top of Entrepreneur's Franchise 500 list.
Its struggles began in 2004. After a respectable #6 finish on our 2003 list, Taco Bell slipped off our top 10 for 15 years. During that time, it battled negative perceptions over meat quality, bad press over lawsuits, and a seven-year stretch of same-store sales declines. Customers weren't wearing the T-shirts, and they certainly weren't shaving the brand's logo into their heads.
A lesser company might have accepted its fate as a low-energy value brand. But for Taco Bell, it was crunch time.
As the legend goes, Taco Bell founder Glen Bell entered the food business in San Bernardino, Calif., in 1948. He started with a hot-dog-and-hamburger stand — just like a couple of other guys you might have heard of.
Bell had known the McDonald brothers since childhood, and Bell's Drive-In launched in competition with the original 1940 McDonald's. But when Bell noticed the long lines at a tiny, independent Mexican restaurant across the street, he devoured as many of their tacos as he could, reverse-engineered the recipes, and opened Taco Tia in 1954.
Eight years later, after selling Taco Tia, Bell opened the first Taco Bell. By then he'd pioneered the ready-made shells that kept him competitive with other fast-food chains. He sold his first franchise in 1964, and within three years, he'd grown Taco Bell to 100 locations — a number he'd triple before going public in 1970. A few years later, Pepsi-Co bought the company and spun it off as Yum! Brands, which today owns Pizza Hut, KFC, and Habit Burger. All in, Yum! has 50,000 restaurants in 150 countries.
But Taco Bell has at least one thing those other brands don't. When analysts talk about the titan of fast-food tacos, they refer to it as a "category of one." It doesn't have major competition the way KFC does with Chick-fil-A and Popeyes, or Pizza Hut does with Domino's and Papa John's. "Taco Bell is unique in the sense that there's not really a major competitor to it in that space," says Benjamin Lawrence, professor of franchise entrepreneurship at Georgia State University.
At $11 billion, Taco Bell's annual sales dwarf those of its closest rival, Del Taco, which clocks in at $850 million. And while Chipotle's $5.6 billion sales are much closer, fast casual and fast food are considered divergent concepts. Chipotle is more likely to steal customers from Panera than from Taco Bell. Plus, it's company-owned, while Taco Bell boasts some of the most involved franchisees in the country.
Taco Bell's unique positioning, says Lawrence, and in particular that collaborative relationship with franchisees, allows it to succeed as a value-driven restaurant even while constantly introducing new products and taking calculated marketing gambles. The company has leaned hard on unity and cooperation to fight through some serious headwind.
Among its many challenges: From 2002 to 2005, Taco Bell endured a four-year national boycott for human rights violations related to tomato pickers. In 2003, it lost a protracted $42 million breach-of-contract lawsuit with the creators of its wildly successful "Yo quiero Taco Bell" campaign, which starred a needy chihuahua and drew criticism for racial stereotyping. In 2006, there was an E. coli outbreak. In 2008, a financial crisis. And in 2011, an Alabama law firm filed a class-action suit claiming Taco Bell's seasoned beef was only 36 percent meat.
Taco Bell spent an estimated $3 million to $4 million to fight the food-quality accusation in the court of public opinion. It ran ads with the bold headline "Thank you for suing us" and, underneath, a list of its so-called "mystery" ingredients. (For the record, the beef is 88 percent meat and 12 percent fillers. Some are more wholesome than others, but they're all on the up-and-up.) It worked. The lawsuit was dropped by April.
There were other PR crises about meat quality and food production, but through it all, Taco Bell was unwavering in its defense, and it became increasingly creative in its messaging. At one point, it introduced a superhero called the Commander of Seasoned Beef, who fought alongside the Super Delicious Ingredient Force team in an animated series modeled after a Saturday morning cartoon. Their archnemesis: the wicked Baron von Bland.
Behind the scenes, Taco Bell was working on another secret weapon. In 2015, long before plant-based meat substitutes swept the restaurant world, Taco Bell became the first fast-food joint to feature menu items certified by the American Vegetarian Association. It also announced a switch to cage-free eggs, reduced its use of chickens raised on human antibiotics, and pledged to reduce human antibiotics in beef 25 percent by 2025. Soon after, headlines began touting Taco Bell's repositioning as one of America's healthiest fast-food chains.
Meanwhile Taco Bell's parent company was on its own image offensive. In 2017, Yum! Brands launched the Recipe for Good, an initiative that drives socially responsible brand initiatives and philanthropic endeavors to fight racial inequity, food insecurity, and climate change. The move earned Yum! a spot on the Dow Jones Sustainability North America Index in 2019, and survey data collected by the public opinion firm YouGov found that Taco Bell's consumer sentiment score roughly doubled over a two-year span.
The transformation played big with media and customers — but it probably wouldn't have been possible without the support of the company's franchisees, says Geiger, of UBS. "This is one of the happier franchise groups out there," he says. "When we talk to owner-operators or franchisees of other brands, many of them voice to us interest in getting into the Taco Bell system."
This helps Taco Bell think big with its marketing stunts. When the brand hatches a plan to offer a whole country a free taco if a player steals a base in the World Series, for instance, it can't pull that off unless its thousands of franchisees are on board. "It takes two to tango in the franchise business," says David Paradise, a franchisee and president of Franmac, Taco Bell's franchise association. "And I can't think of any decision that has been made at the Taco Bell level that we haven't been intimately involved in."
When Paradise opened his first store in 1988, franchisees owned fewer than 40 percent of Taco Bell locations. Today they own 93 percent, and they have a loud voice. Franchisees negotiate their own beverage contracts and run the company's supply chain through a franchisee-owned cooperative. They also serve on committees for just about everything — operations, technology, marketing — and when there's friction, they work toward compromise. "If everybody's in on the takeoff, then everybody will be in on the landing," says Paradise.
In September 2019, just months before vowing to become the "number one QSR for vegetarians," Taco Bell rolled out its "Not-So-New "New' " vegetarian menu, which offers 15 to 20 meatless options, depending on location. What's more, the franchise boasts that nearly any item can be made vegetarian. With in-store kiosks, customers can simply press a button to shift the ordering screen to "Veggie Mode," and with classic Taco Bell theatrics, the company claims its 34 vegetarian ingredients can be combined into "one million unique vegetarian combinations."
Boil it down and Taco Bell's success reduces to a well-seasoned blend of innovative products at value prices, customers who are willing to follow the brand on wild marketing adventures, and some of the most satisfied franchisees in the business. And it's all backed by the "Live Más" tagline, which denotes a culture that's about the experience as much as the food. "We call it the secret sauce at Taco Bell, this innovative, aggressive marketing program where we want to stand out," says Paradise.
After its 15-year hiatus, Taco Bell returned to the Franchise 500 top 10 list with a #8 finish in 2018. It climbed to #4 in 2019. Then #2 in 2020. During that time, Taco Bell introduced a boozy new upscale Cantina concept and became the first QSR brand to integrate its POS system directly into the Grubhub app — a $200 million deal that doubled the check size on delivery orders and helped boost sales by 6 percent.
Taco Bell had clearly entered a hot streak. Under CEO Mark King's leadership, the brand had wrapped its eighth consecutive year of same-store sales growth. After adding between 150 and 175 new restaurants annually for six years, it exploded in 2019 with 375 new locations and a Q4 system-wide sales jump of 13 percent.
As Taco Bell entered 2020, everyone in the company was excited. It had a new breakfast menu, and with global expansion in Brazil, Canada, China, and India, now boasted 7,363 locations. More important, franchisees were happy, and customer sentiment was high. The company had emerged victorious over its critics. Barring something massive and unforeseen, nobody could imagine how its growth would be derailed. Until...
Survival. That's the word Mark King used to describe the brand's focus when the COVID-19 pandemic hit in March 2020. One by one, statewide shelter-at-home orders came down. Customers' workplace commutes evaporated, and after years of unbounded growth, Taco Bell's second-quarter sales dropped 8 percent.
"A week before we shut down the building at headquarters, that initial conversation was that we'd be shut down for two weeks," King says. "And here we are, all these months later, right? And still not much different."
Related: Buying a Franchise Post-Pandemic
When the pandemic hit, Yum! Brands scrambled to deploy gloves and masks to more than 7,000 locations, and in a continued commitment to franchisees, it extended grace periods, deferred royalty payments, and pushed off development commitments. For employees diagnosed or caring for someone with COVID-19, the company launched a global medical relief fund.
Decisions had to be made fast, so there was no time to put them through the usual committees. But even before the initial panic gave way to acceptance of a longer reality, Taco Bell's franchisees were at the table. Every day for two months, even Saturdays and Sundays, King got on a call with Paradise, global chief operating officer Mike Grams, and a handful of other franchisees and corporate leaders. By April, the company's system-wide brand call — historically held once a quarter with more than a thousand franchisees and general managers on the line — became a weekly event.
"We overcommunicated," says King. "Whatever happened, they were in the know."
The efforts resulted in new, family-size meal packs with 10 or 14 tacos or burritos, which doubled the number of tickets over $20, plus a new marketing budget to raise awareness for delivery and order-ahead options. On a single Tuesday in March, Taco Bell gave away one million tacos at the drive-through and transformed its trucks into mobile commissaries to feed frontline workers too busy to visit. It also donated $1 million to the No Kid Hungry charity.
But perhaps most significantly, Taco Bell began working toward success on the other side of the pandemic. In April, it revealed a store-of-the-future concept called Go Mobile, which will debut early 2021 and cater to app-based orders with two drive-through lanes — one for "BellHops" who carry food to cars — and an option for contactless pickup.
"Taco Bell has the perfect combination of being really innovative but trustworthy," says Georgia State University's Lawrence. "That combination of attributes is very well-suited to an environment where people want to get out of their house but don't want to take risks."
To Lawrence's point, Taco Bell's Q3 2020 report was encouraging: The company gained back 3 percent of the same-store sales drop caused by the pandemic. And for the second quarter in a row, Yum! Brands reported that digital sales grew by more than $1 billion over the year prior.
COVID-19 is a new kind of challenge, but Taco Bell already knows how to face adversity. It also knows that long-term success hinges on smart initiatives and an unwavering commitment to what you stand for. "We have this amazing, crave-able food, this iconic brand, and great store operations executed by franchisees," says King. "That combination is what drives this business, and it's what allows us to come through something like this, look to the future, and think that it's brighter now than it was prior to COVID."
The optimism might sound crazy, but then again, crazy is half the fun.