How Taco Bell Became the Top Franchise in the World
The brand's secret hot sauce is letting its franchisees take risks that lead to innovation. That willingness to entertain big ideas has won the company the #1 spot on our Franchise 500 ranking for the second year in a row.
If you want to glimpse Taco Bell's vision of tomorrow, head to the frozen tundra of Brooklyn Park, Minnesota. There, just after the snow melts this spring, a sleek new building called Defy is expected to open — but consumers won't be coming in. The place features no dining room; instead, it will hover over four drive-thru lanes like a spacecraft. Up inside, team servers will cook up tasty Gorditas, Chalupas, and Burrito Supremes and send them down to customers through an innovative food lift system, Jetsons-style.
"The Defy building will be the first one in the U.S. where you actually see the future of what the category will probably look like," says Mike Grams, Taco Bell's president and global COO. "And it was not a corporate idea. It came from one of our franchisees."
That's typical for Taco Bell, which has a long history of listening to its franchisees — a group that now owns more than 90% of the brand's 7,000-plus locations worldwide. Even though the franchising industry at large often favors uniformity, Taco Bell has a somewhat different philosophy: So long as the food and service are brand-consistent, any idea is at least entertained, Grams says. Franchisees are closer to their customers than a corporate headquarters could ever be, the thinking goes, which means they see problems first and can develop game-changing solutions, plus capitalize on whatever makes each local market unique. "There are some guardrails, but they don't come across as handcuffs," Grams says. And since the pandemic, Taco Bell has learned that it can move on new ideas more quickly than ever. "If you're a brand that's looking to go back to normal, you're going to be behind," he explains. "It's going to be constant iteration and change moving forward."
This is, for example, what drove the creation of Taco Bell's Cantina — the brand's urban, alcohol-serving model that is now in 19 designated market areas and 28 cities across the U.S. The brand also credits franchisees with massive and consistent growth: Taco Bell U.S. has been on a 14-year run of positive net new units. And through September, Taco Bell Division's same-store sales were up 12% for 2021. That's helped drive it to the top of the Franchise 500 list—landing at No. 1 last year, and now holding that spot for the second year in a row.
This same spirit of franchisee collaboration is now shaping Taco Bell's future, including the development of Defy.
Brothers Jeff and Lee Engler, of Border Foods in Minnesota, helped create the idea for Defy, but it really started with a problem. The brothers have more than 200 restaurants across Taco Bell's parent company, Yum! Brands, whose portfolio also includes Pizza Hut, KFC, and The Habit Burger Grill, and they were closely watching what they call "the turn-away factor."
"Customers see a long line of cars at a drive-thru and leave," says Lee Engler. The Englers also realized that people now want a more contact-free, digital age experience. Taco Bell had already been exploring ways to improve the drive-thru experience, but the Englers wanted to reinvent it entirely.
They took the idea to Grams, who was intrigued. Grams started at Taco Bell as an assistant manager in 1991, back when the brand was part of Pepsi and 60% of stores were company-owned. Shortly after, the brand flipped its business model to favor ownership by franchisees, many of whom were now able to grow rapidly, so he's witnessed the power of listening to franchisees. He met the Engler brothers in Michigan, reviewed a sketch they'd made of Defy, and talked about the plan to design and build it. Grams was jazzed. So was Taco Bell CEO Mark King. "It was hard to figure out who was going to pay for what, and it ended up being a very expensive project, but never did we hesitate," says King. "Because if this works, it opens up a lot more opportunities for consumers to come through during busy hours, and they love the experience and the food coming down. It's cool."
Throughout the course of the pandemic, Taco Bell has learned an important lesson: Innovation cannot stop, and disruption can be a perfect time to get ahead. The futuristic Defy store is just one example of what the brand and its franchisees had been developing in 2021, and what they all plan to capitalize on this year and beyond. From innovating a customer loyalty program to major menu breakthroughs, Taco Bell has been on a streak that's as hot as its sauce packets.
Here's what else is cooking.
Going 360 Digital
"If you go back to when COVID hit, it didn't exactly play to the strengths of Taco Bell," says King. "We had a significant dine-in restaurant; we had a traditional drive-thru. We were not in the delivery business. We didn't have a loyalty program." So after stabilizing the business and taking care of its people, Taco Bell did what it has always done best: It listened to its cultlike fan base. Customers said they wanted the brand to be more digital, more mobile. They wanted more access, as well as true rewards for being so loyal.
Taco Bell responded quickly. It pushed forward on its Go Mobile concept, an idea it had been developing before the pandemic but actually began to prioritize. There are 50 Go Mobile stores that have dual drive-thru lanes. In both their dual and single-lane drive-thru restaurants, Taco Bell is implementing Go Mobile elements including smart kitchen technology, bellhops, mobile pickup shelving, and kiosk-only ordering to make restaurants more digital-forward.
Taco Bell has also ramped up its delivery options, with 6,837 stores offering the service through Grubhub, DoorDash, Uber Eats, and Postmates. And for users of its app, it added customized menu options like the custom My Cravings Box, where a specialty item, classic item, side, and drink can all be combined for $5. "It gives our fans the flexibility to eat the way that they want to, not the way that the brand is telling them that they have to eat," said Zipporah Allen, who was the company's Chief Digital Officer at the time of reporting, but is no longer with the company.
Taco Bell has tried other incentives to get users onto its app. Earlier this year, for a limited time, the brand offered a membership-style service called "Taco Lover's Pass." For $10 (depending on the location), the service gave app users a "free" taco every day for 30 days, and allowed them to unlock secret menu items.
All these efforts are paying off. Global digital sales surpassed $1 billion in 2020 and now account for 17.2% of total system sales. "That's really a credit to the strong partnership that we have with our franchisees," Allen says.
Going To the Fans
Arguably more than with any other quick-service restaurant (QSR) brand, Taco Bell fans feel a sense of ownership over the menu. That's why in July 2020, the company honored that passion with a new Taco Bell Rewards loyalty program for app users.
Part of this was logistics: At that time, the app helped customers to get in and out of stores contact-free. Then in 2021, as many returned to dine-in, the program was expanded to award points for purchases made at the drive-thru or inside. Users can now scan receipts later from home and still snag those points. But at the heart of the loyalty program is an understanding of modern fandom and a longing for community. It not only offers rewards for free food, but makes customers feel like VIPs with exclusive access to extra deals and first crack at special menu items. "They just want access to the brand," says Allen.
This sense of ownership can cut both ways, though: When customers are disappointed, they feel like the company owes them a response. In 2020, when Taco Bell's finances were rocked by the pandemic, it pulled potatoes to help stabilize the business — and "we definitely heard loud and clear that [customers] were not happy," says Elizabeth Matthews, the company's global chief food innovation officer. There was an uproar on social media, and even a panicky all-caps "SAVE TACO BELL POTATOES" petition on Change.org that got 22,589 signatures. So Taco Bell didn't just bring potatoes back; the brand used its loyalty program to give members first access. It did the same with the Quesalupa. When that fan favorite menu item returned, app users got it first.
By the end of July 2021, Yum! Brands CEO David Gibbs announced that Taco Bell was seeing an overall increase of 35% in active customers in the Taco Bell Rewards Program compared with its pre-loyalty program behavior.
Playing to All Diets
Consumers are increasingly interested in plant-based foods, and Taco Bell is meeting that demand in inventive ways.
Then again, Taco Bell has been a welcome spot for vegetarians since the 1960s, when people were able to
get meat-free pinto beans, cheesy burritos, and potatoes. In October 2015, Taco Bell even became the first QSR brand to score American Vegetarian Association-certified menu items.
Now it's stepping up those efforts even further. It has more than 30 AVA-certified vegetarian or vegan ingredients, and developed a Veggie Cravings menu for online ordering. Vegetarian items now account for 14% of the brand's sales mix, up from 6% in 2015. The brand also made it easier to swap veggies for meat at the counter, the kiosk, or on the mobile app.
If you lived near Taco Bell's California test market in spring 2021 or any of its 95 Detroit-area test locations in October, you might have already tried the brand's next big idea: It's a new "Cravetarian" Taco, featuring a plant-based protein made from chickpeas. Likely in more markets soon, the idea is to make it easy for customers to swap the "boldly seasoned" beef substitute into any of the main menu items — and that's just the beginning, Matthews says.
"We're [also] working on a new [meat-free] protein with Beyond Meat that's never been seen, not out there. I'm going to keep it a little bit under wraps, but we're really excited to test that," she says.
Ultimately, all of this is about choice, right on down to the way fans use those sauce packets — whether they prefer one packet per taco, or one squeeze per bite. Of course, all that choice can come at a price, and what happens to that packet once you're done with it — well, that's the next big question.
Rethinking Those Sauce Packets
Taco Bell knows that a growing part of its consumer base is worried about the environment, which is in part why it announced a goal to make all of its consumer-facing packaging recyclable, compostable, or reusable by 2025. But here's the hardest part of reaching that goal: sauce packets.
The company's Fire Sauce and Hot Sauce packets are so iconic that you can buy pool floatie replicas of them. But so far, the brand cannot figure out a way to manufacture them out of eco-friendly materials. That's a problem, because there are also more sauce packets produced industrywide each year than there are humans on the planet — 8.2 billion annually for Taco Bell alone — and, used or not, they're all destined for the landfill.
In April 2021, Taco Bell took a step toward solving that problem. It became the first QSR brand to partner with TerraCycle, a company that, among other things, turns nonrecyclable post consumer waste into raw materials. Taco Bell consumers can now create an account on Taco Bell's website or app, get a box to store their old packets, and mail it to TerraCycle.
"We're really trying to make sure that we don't have any consumers that are missing out on Taco Bell because they don't feel good about what we're doing for the planet," says Matthews. She shied away from giving details but said the brand is engaging suppliers and even competitors who use condiment packets to try to work toward an industrywide solution. The brand is also removing toxic chemicals like PFAS — found in everything from nonstick cookware to waterproof jackets — which the company has already achieved with paper bags and cups. It's now testing a sustainable packaging suite in San Francisco.
"I want to get there before 2025," Matthews says."Innovation is about connecting dots to make these big ideas, but we start with listening and we start with watching. And right now, the consumer is pretty clear," Matthews says. "They want to have choice. They want to have value. They want to have convenience. They want to have sustainability. They don't want to feel bad about brands that they're buying products from."
Partnering for the Future
What lies ahead for Taco Bell and the QSR world? No one knows for sure, of course, but Grams hopes the past two years have made a statement to Taco Bell's franchisees: "We don't just do things because we can. It's an understanding and a partnership that we've got to do it together," he says. "If you know anything about our history, we've had some ups and downs. Many of our franchisees have been through those peaks and valleys. They have it in their DNA. The freakout factor is lower."
And that, in a way, is a kind of liberty: It means Taco Bell can move quickly, have fun, and know that its franchisees and fans are in for the ride.
For example, when its fans were outraged over the 2020 Taco Bell potato famine, the brand didn't issue your standard mea culpa. Instead, its marketing team called CEO King to, as they said, "run something by him."
"I was in Scottsdale with my wife, and I get this call," King says. It was a Saturday afternoon; they were visiting friends. His team pitched an idea: They wanted to superimpose his face on an animated spud, so he could announce that potatoes would be back by March. He'd also hint at the partnership with Beyond Meat with a wink-wink line about going "above and beyond" for vegetarians in the future.
King said yes. Customers were thrilled, though all of King's golfing buddies now call him Mr. Potato Head. But maybe that's just the price of success. "I think," King muses, "what allows [us] to be consistently better than average is that people have a license to say to the CEO, 'Hey, do you want to be Mr. Potato Head?' That's what drives a lot of what happens here at Taco Bell."
Entrepreneur Editors' Picks
This Founder Quit His 'Prison'-Like Teaching Job Within 2 Months. Now, He and His Sister Are Helping Other Teachers Leave the Classroom and Achieve Financial Freedom.
If You Focus on Problems, You'll Only Find More Problems. Here's How to Focus on Solutions.
Facing More Than 15 Years in Prison, This Founder Transformed His Hustle Into a Powerful Personal Brand and Business. Now, He's Giving Back in a Big Way.
Apple Asks This Jarring Interview Question as a Secret Way to Evaluate a Candidate