FDD Talk 2015: The Taco John’s Franchise Opportunity (Financial Performance Analysis, Estimated Costs, and Other Important Stuff You Need to Know)

In this FDD Talk 2015 post, you’ll learn the following:

• Section I – Background information on the Taco John’s franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Taco John’s franchise, based on Item 7 of the company’s 2015 FDD

• Section III – Presentation and analysis of Taco John’s financial performance representations, based on Item 19 of the company’s 2015 FDD, including information on the:

• 2014 average sales, cost of goods sold, labor expenses, variable expenses, controllable costs, and net income before occupancy and general and administrative costs for six of ten company-owned and operated free-standing traditional Taco John’s Restaurants in Colorado and Wyoming with drive-thru that were opened for all of calendar year 2014

• 2014 average sales for 188 Taco John’s Restaurants with drive-thru windows and that reported sales to the franchisor through its QuikServe Point of Sale System for all of calendar year 2014

• 2014 average sales for 27 Taco John’s Restaurants located in convenience stores and travel plazas with drive-thru windows and that reported sales to the franchisor through its QuikServe Point of Sale System for all of calendar year 2014

• 2014 average, high, and low cost of goods sold as a percentage of net sales for the annual period ending December 31, 2014 for 9 free-standing Taco John’s Restaurants owned and operated by the franchisor

Section I – Background Information

Taco John’s Looks for Exponential Growth

Taco John’s is striving to become the fastest-growing Mexican quick-service restaurant brand in the U.S., capitalizing on the strong growth of both the chain and the Mexican QSR category.

According to The NPD Group, traffic to quick-service restaurants grew just 1 percent in 2014, but among Mexican QSRs, that growth was up to 6 percent. Customer spending at Mexican QSRs grew 10 percent, compared to the 3 percent total spending for the fast-food industry.

Taco John’s saw 9.6 percent growth in year-over-year same-store sales in April 2015, compared to a 1.9 percent increase in the QSR industry as a whole. In May, the chain grew 7.3 percent compared to the QSR industry’s 1.1 percent.

CEO Jeff Linville, who took over company leadership in 2013, credits part of the growth to the chain’s Summer of Tacos campaign, which ran from April to August, and its series of popular limited-time menu items: Street Tacos, Walking Tacos, and a line of premium beverages.

As sales are increasing, so are unit numbers, with numerous new franchise locations planned in current markets as well as new markets, such as New York, Indiana and Virginia. Franchise agreements signed in 2014 will bring 25 locations to these markets.

In April 2015, Love’s Travel Shops & Country Stores signed an agreement that will add 10 Taco John’s restaurants to its travel stop locations, and in August 2015, real estate developer Michael House signed a five-store agreement, with an option for 10 additional units, to bring the first Taco John’s stores into the Indianapolis area.

Eyes on Taco Bell?

Linville hasn’t claimed that Taco John’s will beat front-runner Taco Bell, but he implied that the smaller chain can hold its own.

“Taco John’s is already a major player on our home turf,” Linville said on the chain’s new franchise website, tacojohnsfranchise.com, which launched in July 2015. “We’ve gone head-to-head against the biggest national player in Mexican QSR, and we’ve won those battles.”

Namesake Started Chain as Taco House

Taco John’s got its start in March 1968 as Taco House, a small taco stand in Cheyenne, Wyoming, opened by John Turner, a U.S. Air Force soldier who was stationed in Cheyenne.

Taco House was instantly popular among the locals for its tacos, burritos and bold spices. Two of those locals, businessmen Harold Holmes and James Woodson, bought the franchise rights later that year and named the company after Turner.

Taco John’s traded up from taco stands to drive-ins and eventually to interior seating. The chain introduced the Taco Tuesday concept, was the first Mexican quick-service restaurant to offer breakfast burritos, and has sold Potato Oles, its signature menu item, since 1979.

Today, Taco John’s has more than 400 restaurants in 25 states.

Rebranding Campaign

Taco John’s began rebranding efforts in August 2014, with a new tagline (“Unwrap the Original”) and associated advertising campaign and website promotions.

Packaging, point-of-purchase materials, TV ads, social media interaction and digital marketing will highlight the chain’s push to build on the nostalgia of original offerings such as Potato Oles and Mexican-inspired wings. The goal is to be more relevant for Millennials and new markets without alienating the current customers.

Earlier in the year, the chain unveiled two new bold, streamlined designs that would be used in new store openings.

Chain Spices Up Breakfast

Taco John’s added more kick to its breakfast menu with the Spicy Chorizo Breakfast Burrito, which the chain added in August 2014. The burrito is packed with scrambled eggs, chorizo sausage, jalapeños and spicy salsa.

As part of its emphasis on the breakfast menu, Taco John’s started serving premium Arabica coffee by Boyer’s in fall 2014.

Sweet Stuff

Taco John’s added the OREO Churro to its dessert menu in August 2015, and sales nearly doubled initial projections. Linville said in a news release that the OREO Churro sparked demand across the dessert menu. Also doing very well are Mexican Donut Bites, added in September.

Cheetos Burrito and Return of Fish Tacos

Among the highlights of limited-time menu items were the Flaming’ Hot Cheetos Burrito, which combined the spicy Cheetos with chorizo sausage, jalapeño slices, nacho cheese and chile de arbol salsa, and the return of fish tacos in a comeback that also added the wild-caught whitefish fillets to the Sante Fe Burritos and Bowls line.

Gooden Rises to VP Position

Stephanie Gooden, who started working as a receptionist in the chain’s human resources department 30 years ago, was promoted to vice president for human resources in February 2014. Gooden has been director of human resources since 2010 and was instrumental in the search that led to Linville’s hiring as CEO.

In other major hires, Ted Suor was named vice president for supply chain and Stephanie Forand was hired as director of human relations in May 2015, and Bille Jo Waara became chief marketing officer in July 2014.

Section II – Estimated Costs

• Please click here for detailed estimates of Taco John’s franchise costs, based on Item 7 of the company’s 2015 FDD.

Section III – Financial Performance Representations (Item 19, 2015 FDD) and Analysis