Del Taco, Inc.

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Del Taco, Inc.

25521 Commercentre Drive
Lake Forest, California 92630
U.S.A.
Telephone: (949) 462-9300
Fax: (949) 462-7444
Web site: http://www.deltaco.com

Private Company
Founded: 1964
Employees: 5,700
Sales: $388 million (2002)
NAIC: 722110 Full-Service Restaurants

Del Taco, Inc. prides itself on being the second largest Mexican concept fast food chain in the United States. It is also one of the most consistently successful of all fast food companies, registering thirteen consecutive years of sales growth between 1990 and 2003. The chain has approximately 415 outlets in the United States, with a presence in most states west of the Mississippi as well as some on the Atlantic coast. Many are open 24 hours a day. Although its specialty is Mexican fast food, such as tacos and burritos, Del Taco also serves hamburgers, French fries and shakes, as well as offering a breakfast menu. Unlike many other fast food chains that simply reheat meat and other ingredients that have been prepared elsewhere and frozen, Del Taco restaurants prepare all the food completely onsite. Del Taco restaurants reported average annual sales of $1 million per store in 2003, near the top of the industry.

Origins

Del Taco’s origins lie in California’s Inland Empire, the region around San Bernardino, a fertile ground for fast food companies—McDonald’s and Taco Bell, Del Taco’s main competitors, were both founded in the area as well as lesser names like Baker’s, Taco Tia, and Wienerschnitzel. Del Taco’s founder, Ed Hackbarth, joined the world of fast food in 1954 after his discharge from the U.S. Air Force. He was hired by Bell’s Burgers founder Gus Bell to operate their new store in Barstow, California. Hackbarth’s entry into San Bernardino’s fast food industry came just after his boss had developed a way to make tacos on a mass scale. Bell had started selling them from his burger stands and in 1954 started a chain of taco stands, Taco Tia. Five months after Hackbarth joined Bell’s company, his store was converted to a Taco Tia. Hackbarth left Bell’s Burgers in 1961 to open his own fast food place, Casa del Taco in Yermo, California. Unlike his competitors, Hackbarth combined the Inland Empire’s most popular fast foods, selling hamburgers, fries, and shakes as well as Mexican fare.

By 1964, Hackbarth had partnered with real estate broker David Jameson, who opened the fourth Casa Del Taco in Corona, California. Jameson’s branch was the chain’s first drive-through unit. Dick Naugle, who installed the kitchen equipment in the Corona store, was impressed by its design and soon became a partner in the fledgling business. In 1966, Hackbarth, Jameson, and Naugle founded Red-E-Food Systems, Inc. with the idea of franchising the Casa Del Taco brand. Before long, the restaurants were being founded throughout southern California. The three partners gave as much personal assistance to new franchisees as they could. Besides advice, they would help at the grand opening of new stores with their kids, who dressed up and passed out free soft drinks and prizes to customers. In 1972, Casa Del Taco opened its largest store to date in Newport Beach, California. It was a 28-seater designed by David Jameson that would become the prototype for future outlets.

A New Name and New Owners

In 1973, the company dropped “Casa” from its name and Red-E-Food Systems became Del Taco, Inc. By that time, the company was enjoying a remarkable growth spurt; during one period, they were opening an average of a new restaurant every month. Hackbarth and Jameson sold Del Taco to a group of investors in 1976. Dick Naugles had left the company at the beginning of the decade to start his own Mexican fast food chain, Naugles. After an up and down history and several changes in ownership, most Naugles restaurants would eventually be converted to Del Tacos in the late 1980s. Although they sold Del Taco, Inc., Hackbarth and Jameson retained the rights to develop Del Taco stores of their own, and Hackbarth continued to operate his as late as 2001.

The company continued to grow quickly under its new owners. By February 1977, there were 50 stores in the chain; this number rose to 100 just 19 months later. A fateful decision in 1977 by Del Taco’s new owners would return to haunt the company in later years: they sold the exclusive rights to use and develop the Del Taco name throughout the United States—with the exception of California; Eugene, Oregon; and Yuma, Arizona, where Del Taco already had outlets—to the W.R. Grace & Company. Grace, primarily a chemicals company, founded a new company, Del Taco Restaurants Inc. of Dallas, Texas, and a new subsidiary, DTG Inc., to oversee the various fast food chains it was acquiring. Del Taco, Inc. of California held a 20 percent share of DTG and received a royalty on sales, but with the sale it surrendered the right to pursue national expansion on its own.

Nonetheless, by 1981 the New York Times could report that competition between Del Taco and segment leader Taco Bell was “very intense.” However intense it might have been, the competition was mismatched. Del Taco had some 352 units, still located almost exclusively in California, going against Taco Bell’s 1,400 plus stores located throughout the continental United States. Taco Bell also easily outstripped Del Taco in the perception of consumers. The larger chain spent nearly $22 million on television ads at the time compared to about $2.5 million by Del Taco, mainly on radio ads. Five years later, in October 1986, looking to make up lost ground, Del Taco entered negotiations to purchase W.R. Grace’s approximately 120 Del Taco units in Georgia and Texas. The two companies reached an agreement on paper, but this fell apart two months later, wrecked by the failure of Del Taco to obtain financing for the deal.

In the meantime, Del Taco, Inc. remained a privately held company. It resisted the temptation to float stock offerings to pay for expansion. Instead, it began selling “limited partnerships”—essentially a share of non-voting ownership in the firm. The first such offering brought in $4.3 million, the second $6.7 million. Between February 1986 and February 1987, its third offering had raised approximately $7.5 million of a hoped-for $8 million to be used for the construction of new restaurants. Del Taco had 188 restaurants in early 1987, both franchises and company-owned, not including those of the “second Del Taco” in Texas. Del Taco planned to launch 35 new units by the end of 1987.

Changing Ownership in the Late 1980s

In February 1988, businessman Anwar Soliman pulled off a coup that created the nation’s second-largest Mexican fast food chain and the main competitor to leader Taco Bell. For an undisclosed amount of cash, Soliman acquired both Del Taco and its 202 restaurants and the Naugles chain of 171 Mexican fast food outlets founded by one-time Del Taco partner Dick Naugles in the early 1970s. Soliman, already the owner of several restaurant chains—including Black Angus, Grandy’s, Spoons, and Velvet Turtle—had his own history with Del Taco: as president of the W.R Grace Restaurant Group in 1977 he had been the mastermind behind the purchase of the rights to expand Del Taco throughout the United States.

Naugles and Del Taco were merged into Soliman’s new company, AWRII Acquisition Corp. Once in possession of Del Taco, Soliman began buying out Del Taco’s numerous limited partners. Soliman’s acquisition of the two companies was made possible in large part by about $211 million in credit from General Electric Corporation’s financial services subsidiary GE Capital, which held a controlling interest in AWR II. One year after the purchase, Soliman began the conversion of most of the Naugles restaurants to Del Taco units.

Soliman’s ambitious plan to create a second national taco chain was not fully realized, however. In January 1990, a Del Taco management group purchased the company for an undisclosed sum of cash, debt, and securities. Soliman’s failure was reportedly his push to position Del Taco both as a strong competitor to Taco Bell and to remake the chain as a more upscale restaurant, contradictory moves that confused consumers. Laying off key field managers and cutting back on Del Taco’s advertising budget also contributed to the firm’s problems under Soliman. One of the first moves by the new owner-management was to cut prices to match Taco Bell’s successful 59 cent menu and regain the business of value-conscious diners. Servicing the considerable debt Soliman had taken on to buy the two chains had played a major role in his company’s problems. Although sales at the chain remained flat during 1988 and 1989, dropping but slightly from $211.7 million to $211.0 million, the $50,000 each store had to make in annual payments to reduce the debt made it virtually impossible to turn a profit. The lower prices inaugurated by the chain made it difficult for many Del Taco stores to operate in the black even after the debt was refinanced. GE Capital, which may have orchestrated the buyout, continued to play a major role in the company and was given three positions on the board but no shareholder interest. In June 1990, GE Capital pressured Del Taco to close 80 outlets which were unprofitable.

On the East Coast, W.R. Grace & Co. was still trying to sell off the other Del Taco. Del Taco Restaurants, Inc. had become a publicly held firm traded as DETA on the NASDAQ and Grace was gradually buying up all outstanding DETA shares in order to more easily find a buyer for the 79 Del Taco restaurants and 36 Taco Villa outlets it owned in Georgia, Texas, and other states. By September 1991, it had spent about $5 million to acquire 100 percent ownership of the chains. In March 1992, Grace sold all of its Del Taco and Taco Villa restaurants to Taco Bell, which planned to convert them to its own brand and format.

Company Perspectives

Del Taco offers menu items that appeal to a broad range of tastes with a strong emphasis on quality and value. The menu includes tacos, burritos, quesadillas, nachos, world famous crinkle cut fries, Double Del Cheeseburgers, shakes, and breakfast burritos with new tastes introduced regularly. Each item is made to order only when the customer orders it, with many quality ingredients, including lard-free beans made from scratch daily, real cheddar cheese grated on site, chicken grilled fresh every hour, and fresh produce.

A New Look and Plans for Expansion

Del Taco meanwhile had launched a $14 million program to redesign its restaurant exteriors, kitchens, and corporate logo. The company presented its Concept 2000 restaurant design and in August 1992 introduced its new logo. Gone was the old orange and blue sunset. In its place was a yellow sun which rose over green mountains against a red background, the colors of Del Taco food ingredients—cheese, lettuce, and tomatoes. In the early 1990s, only 75 of the company’s 320 restaurants were franchised, and in 1992 action was taken to find new franchisees. In perhaps its most important move in the summer of 1992, Del Taco regained full rights to its corporate name from W.R. Grace & Co. This meant that there was only one Del Taco in the United States and the door for national expansion was finally open. With that in mind, Del Taco executives announced far-reaching plans to expand the chain to 500 stores by 1995 and to add another 225 by 2000. The first new markets it set its sights on were Las Vegas, Nevada; St. Louis, Missouri; and the Northeast Corridor.

In March 1993, Del Taco startled the financial world when it filed for protection under Chapter 11 in U.S. Bankruptcy Court. Observers were puzzled by the move. Despite the system-wide redesign which included kitchen equipment upgrades needed to enable the chain to return to 24-hour-a-day operations, Del Taco was profitable. Moreover, its main creditor, GE Capital, owned 79 percent of the company. The firm was suffering under a variety of less visible problems, however. It continued to pay rent on several unprofitable outlets that had already been closed, and it was attempting to negotiate lease reductions on a number of other high cost sites. To make matters worse, it had been hit with a $3 million lawsuit from a former supplier.

In November 1993, Del Taco was granted protection by bankruptcy court. As part of the restructuring, GE Capital won full ownership of the company. President Kevin Moriarty and vice-president of marketing Paul Hitzelberger lost the 21 percent of Del Taco they had previously owned but retained their positions in management. As part of the agreement, GE Capital reduced its claims against the company from $87.6 million to $55 million. However, just four months later, Del Taco underwent more dramatic changes when management bought the company once again, this time as a group led by Moriarty, Hitzelberger, and other executives with financial assistance from GE Capital. The new management team immediately introduced widespread changes such as new recipes for most of the Del Taco menu and in-kitchen computers to speed order handling.

By November 1994, the company had signed a deal to open 15 franchise stores in the Northeast as well as setting up new outlets in the Southeast, where the Del Taco name was already recognized. By fall 1995, the chain was nowhere near the goals publicized just a few years earlier. Rather than growing to 500 units, the chain—hurt by the closing of numerous unprofitable units—had only 300 stores. However, annual store volumes, which had nearly doubled since 1990, were averaging about $725,000. The chain began to prosper. By spring 1997, Del Taco’s total sales had reached an estimated $250 million, minuscule compared to Taco Bell’s $4.8 billion but second in the field nonetheless. President Kevin Moriarty predicted that the company would be debt-free by 2002. In December 1998, it boasted 325 stores in twelve states.

Struggles and Success in the Late 1990s and Beyond

In 1999, Del Taco launched a major series of television ads that portrayed a western hero named “Del Taco.” Based on the Sergio Leone spaghetti westerns of the 1970s, “Del Taco” was an underdog character—much like the restaurant Del Taco with respect to industry giant Taco Bell. The spots were popular, but just a month after they started running Del Taco was hit by a lawsuit from Zorro Productions Inc. and Tristar Pictures Inc., who claimed the “Del Taco” character—masked and costumed in black—infringed on their rights to the trademarked Zorro figure. Del Taco settled the suit in January 2000, agreeing to make changes in the Del Taco character, but soon discontinued the ad campaign altogether. Two years later, Shaquille O ’neal filed a similar suit against the chain, claiming that “Shaq Johnson,” a character in Del Taco radio ads, violated his registered “Shaq” trademark. Those ads were also discontinued.

Key Dates

1961:: Ed Hackbarth opens the first Casa Del Taco store in Yermo, California.
1966:: Hackbarth, David Jameson, and Dick Naugles found Red-E-Food Systems, Inc.
1973:: Red-E-Food Systems, Inc. is renamed Del Taco, Inc.
1976:: Hackbarth and Jameson sell Del Taco.
1977:: New owners sell exclusive rights to use and develop the Del Taco brand outside California to W.R. Grace & Co., which forms Del Taco Restaurants Inc. in Dallas and incorporates it into DTG Inc, its fast food subsidiary.
1986:: Del Taco is unable to repurchase national rights from W.R. Grace.
1988:: Anwar Soliman purchases Del Taco and Naugles restaurants and merges them into single chain of Mexican fast food restaurants.
1990:: Del Taco is purchased from Anwar Soliman by Del Taco management; Kevin Moriarty joins Del Taco as chief executive officer.
1992:: W.R. Grace sells Del Taco Restaurants Inc. to Taco Bell and resells rights to Del Taco name to Del Taco, Inc.
1993:: Del Taco seeks protection under Chapter 11, and a management team led by Kevin Moriarty buys Del Taco from GE Capital.
1996:: Del Taco’s world headquarters settles in Laguna Hills.
2003:: Del Taco outlets top $1 million in annual average sales.

In 2000, Del Taco had 372 stores located in ten states. The chain had had remarkable per-store sales growth throughout the 1990s. Total annual sales had reached about $319 million. In 2000, the average unit had $927,000 in sales, one of the tops in the fast food industry, beating out giant rival Taco Bell by almost $10,000 per store. In 2001, Nation’s Restaurant News reported that Del Taco had the largest average sales volume per store of any chain in the sandwich category, a remarkable achievement for a Mexican food chain, which traditionally ranked low in average sales. The chain had recently begun a major expansion into Arizona and Las Vegas. In areas where Del Taco stores were located, the chain was taking customers away from Taco Bell, which suffered a setback when a supermarket taco shell that licensed its name turned out to contain genetically modified corn used for animal feed. An important deal was signed in late 2000 with the Compass Group PLC that enabled Del Taco stores to open on military bases. The first to do business was the store at Patuxent River Naval Air Station in Maryland in early 2001. Others were planned for bases in Puerto Rico, Naples, and Italy.

In February 2002, a group of former Del Taco employees, all of whom were black, brought a discrimination suit against the chain. The group claimed that while working at Del Taco restaurants in the Los Angeles area they had suffered verbal harassment, had been passed over for promotions in favor of Hispanic workers, and were being fired and replaced by illegal immigrants. The case had not been settled in mid-2003.

In a further effort to raise its public profile, Del Taco launched a sports-sponsorship program with teams in eight states, including the Anaheim Mighty Ducks and Phoenix Coyotes hockey teams, basketball’s Los Angeles Clippers and Utah Jazz, the University of Nevada at Las Vegas’s football and basketball teams, and minor league hockey and baseball teams. The campaign was designed to attract what the chain considered a core demographic segment, men between the ages of 18 and 34. The deal placed the Del Taco logo on signs, drink cups, and special promotional items at the stadiums of the partner teams.

In early 2003, Del Taco announced that it had reached a landmark in 2002: its free-standing restaurants topped $1 million per store in average annual sales. The achievement was all the more remarkable considering that a fast food price war had driven down average sales at other chains, notably McDonald’s and Carls’ Jr., while Del Taco registered a 2.2 percent increase. It was the thirteenth consecutive year of sales increases reported by the company. At the same time, the firm continued to expand, moving slowly into Texas, Montana, and Washington state.