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Higher prices, especially for delivery, drive sales growth at Del Taco

The Mexican fast-food chain raised prices in the fourth quarter and says its delivery premium bolstered profits.
Del Taco delivery charges
Image courtesy of Del Taco

Same-store sales at Del Taco increased 3.8% in the fourth quarter, led by strong sales at stores operated by franchisees, who own roughly half of the chain’s 600 units. The strong results have continued into 2021, the company said on Monday, with sales growth improving across the board.

Much of that has come from higher prices, both overall and on delivery orders specifically. The chain raised prices by 4% in the fourth quarter, which helped bolster margins. Restaurant margins declined just 40 basis points in the quarter despite higher pandemic-related costs and wage rates.

But the biggest price increase was reserved for customers of third-party delivery services. Del Taco raised prices on such orders by 20% in the third quarter last year to offset the providers’ charges.

“We believe the 20% delivery price premium enacted in Q3 has been effective,” CEO John Cappasola said on the company’s fourth-quarter earnings call Monday. He said the prices “allowed us to improve margins and flow-through on delivery transactions.”

Still, he said, “it is clear delivery will be a permanent and meaningful sales channel for Del Taco.”

Fast-food chains have aggressively raised prices in recent months, unafraid of the impact of losing customers given that many have nowhere else to go, thanks to the closure of much of in-restaurant dining.

Del Taco’s 4% increase in prices is higher than overall restaurant menu price inflation but lower than the 6.2% that fast-food restaurants increased prices in January. Delivery premiums have also become increasingly common. Most of the largest quick-service chains have some form of delivery premium—Chipotle and Noodles & Co., for instance, recently raised delivery prices, but several other concepts did so more quietly.

The reason is relatively simple: Delivery companies charge restaurants service charges of at least 15% of the cost of the order. As delivery became more prevalent since the outset of the pandemic, that charge became onerous on companies’ profitability. As such, many chains began simply raising prices for delivery.

While third-party delivery companies had earlier resisted such moves, they gave that up more recently to keep big chains’ business.

At Del Taco, delivery was 6.3% of sales in the fourth quarter—it was just 2% of sales in the same period a year ago. Delivery orders remain almost twice as high as non-delivery orders, and the higher prices helped the chain offset the companies’ fees.

Restaurant margins in the quarter were 17% of revenues, down 40 basis points from the same period a year ago—which company executives considered a strong outcome, especially given the higher overall costs associated with the pandemic. Indeed, executives said, margins would have improved but for higher costs for advertising.

While the higher costs could push customers toward other convenience-focused services, especially as the pandemic ends, Del Taco executives suggested the service remains in demand and will continue post-pandemic.

Steven Brake, the company’s chief financial officer, said the company expects delivery fees to continue increasing this quarter as such orders increase. But he expects that to level off thereafter as the economy reopens.

Del Taco features a number of delivery-focused elements in its new prototype, which it calls Fresh Flex—the company is hoping that at least 20 locations will be remodeled with the new image this year. The image will feature delivery driver pickup stations, for instance.

“Clearly, demand from the consumer” is there, Cappasola said. “That all plays into a need for convenience and greater access that the consumer is wanting from brands.”

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