Taco Bell, McDonald’s Go Upscale To Win Back Customers

by Trefis Team
-11.90%
Downside
504
Market
444
Trefis
CMG
Chipotle
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Taco Bell, owned by Yum! Brands (NYSE:YUM), is introducing a new Cantina Bell menu, created with the help of celebrity chef Lorena Garcia. The move will help the restaurant chain compete against the likes of Chipotle Mexican Grill (NYSE:CMG) and Qdoba, restaurants which are generally considered a grade above the traditional fast food chains. Taco Bell has an advantage in terms of pricing. The burrito as well as the Cantina Bowl, both part of the new menu, will sell st under $5, compared to $8 at Chipotle. [1] Chipotle continues to perform strongly, rising more than 20% in 2012 itself, outperforming the broader indices.

We have a $417 price estimate for Chipotle, which is less than 5% above the current market price.

See our complete analysis for CMG stock here

Taco Bell Not Alone

It is not just Taco Bell that is trying to image itself in a more upscale manner. McDonald’s (NYSE:MCD) has been doing a number of things to cast off its image of a large scale, inexpensive burger serving restaurant chain and to appeal to a wider range of consumers. The company will spend around $1.5 billion in 2012 to reimage and upgrade its existing restaurants. Some of the upgradations include more comfortable seating, free Wi-Fi and even McTV.

Even the menu has been reshaped to appeal to a wider consumer base. In 2011, the company launched Fruit & Mango oatmeal, Mango Pineapple Smoothies, Peppermint Mocha as well as other items. The new menu additions continued in 2012 with the introduction of Chicken McBites and the experimentation with bakery products.

Thanks to their years of experience in the restaurant industry, their efficient supply chains and the economies of scales, only select fast food chains like Yum! or McDonald’s have the capability to spend money on developing new menu products and dole out products at prices usually below their competitors. Moreover, their nationwide outlets ensure a readily available market for such products.

This is smart play from McDonald’s and Taco Bell. The idea is to capitalize on a demand created by some other restaurant chain by offering a similar product type but at a lower price. And another thing that is clear over time is that offering a similar product at lower prices will continue to attract consumers. McDonald’s McCafe is a perfect example of that. Chipotle and Qdoba, watch out.

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Notes:
  1. Taco Bell adding upscale items to compete with Chipotle, Qdoba, freep.com, June 7, 2012 []
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