Taco John'S International, Inc. Business Information, Profile, and History

Company Perspectives:

The Taco John's Brand Position: To adult Mexican food lovers who use fast food restaurants and are willing to pay a bit more to get larger portions, more variety, and fresh preparation, Taco John's offers higher quality, more authentic-tasting Mexican food than Taco Bell, served in a more personal and comfortable environment.

History of Taco John'S International, Inc.

Taco John's International, Inc. franchises and serves a chain of Mexican-style fast-food restaurants. The privately owned firm supports around 400 outlets--only a handful of which are company owned--in 24 states, centered in the upper Midwest and West. Average annual sales for a Taco John's unit in 2002 was about $490,000, which translated into total systemwide sales of approximately $200 million. Through an emphasis on food seasonings, generous portions, good service, and fair prices, the company has come to rival Del Taco, Inc. as the second largest Mexican quick-service chain in the United States. (The Taco Bell chain, owned by YUM! Brands, Inc., is by far the largest player in this sector.) Taco John's has generally concentrated on rural areas and smaller towns but began targeting major urban areas, such as Denver and Kansas City, in the early 2000s.

Early History: From Taco Stand to Taco John's Chain

The sprawling restaurant chain dubbed Taco John's was born as a single, tiny taco stand. The "Taco House" as it was called, opened in 1968 in Cheyenne, Wyoming. It was started by a high-plains cowboy rancher named John ("Taco John") Turner and his wife. The Taco House was a big hit with the locals in Cheyenne because it offered good-tasting Mexican food, fast. An important ingredient in the taco stand's success was the spice that the Turners used in the food. They ground various spices and prepared all of the seasonings in their basement and garage. They used the seasonings to flavor traditional Mexican fare, including tacos and burritos.

Intrigued by the success of the bustling taco stand, Cheyenne businessmen Harold Holmes and Jim Woodson purchased the franchise rights to the fledgling venture in 1969. They believed that they could transport the concept to other cities in the region and, if the new restaurants were as popular as the first Taco House, profit handsomely. They realized that the special seasonings developed by the Turners were important to the chain's success. In fact, the Turners' seasonings became a closely guarded trade secret that continued to be used by Taco John's restaurants throughout the 1980s and into the 1990s.

Holmes and Woodson immediately began franchising restaurants based on the Taco House concept. They changed the name of the outlets to "Taco John's," but left many other elements the same, including much of the menu. They opened their first franchised stores in Rapid City, South Dakota; Scottsbluff, Nebraska; and Torrington, Wyoming. Like the first Taco House, the new Taco John's outlets were a big success. Holmes and Woodson knew that they were onto something. During the 1970s, then, they expanded throughout the upper Midwest and West, franchising Taco John's outlets primarily in small towns.

The decision to target small towns evidenced a new strategy that became characteristic of the Taco John's organization. The franchising concept was relatively new at the time, and most companies up to that period had focused on opening franchise outlets solely in larger urban areas. In contrast, Holmes and Woodson decided to open their stores in small towns, which were often devoid of competition. Their goal was to bring to those small towns a unique eating experience, including good-tasting Mexican food, served fast, at reasonable prices. The overall strategy was ultimately a big success. Each Taco John's eatery developed a loyal customer base in its town, and also managed to attract regular patrons from outlying regions that would become desperate for a Taco John's "fix."

Growth Fueled by Franchisees in the 1970s and 1980s

In fact, Taco John's loyal fans played an important role in the company's growth during the 1970s and 1980s. Many customers in outlying areas would write to the Cheyenne headquarters, begging the company to open an outlet closer to them. In some cases, those same customers became franchisees, owning and operating their own store. Likewise, some Taco John's fans who relocated to other regions, realizing that no Taco John's existed in their area, would open their own Taco John's franchise. The result was that the company gradually blanketed many parts of the upper Midwest--South Dakota, Minnesota, Nebraska, Wisconsin, Iowa, Wyoming--with Taco John's outlets.

Taco John's prospered during the 1970s and 1980s by cultivating a win-win partnership with its franchisees. Franchisees paid Taco John's a franchise fee, plus royalties on income from their stores. In return, they got complete support from Taco John's. In the early years, Taco John's would ship a prefabricated 12- by 30-foot taco stand from Wyoming; the stand was complete with kitchen appliances and other necessary fixtures. Later, the company built or outfitted larger structures with seating, rather than shipping prebuilt units. (One of the original prefabricated units was still operating in 1995 in Des Moines, where it had been a lunchtime favorite with high school students since 1973.) Taco John's would then work to ensure that its franchisees were given the training and support they needed to make their stores prosper. When the franchisees profited, so did Taco John's. As the word got out that a Taco John's franchise was a good investment, the company found a steady supply of franchisee candidates.

Thus it was the enterprising franchisees that became the engine for Taco John's growth. Those entrepreneurs typically toiled long hours to make their restaurants successful, and often opened other Taco John's outlets in their areas. Representative of the franchisees who helped to grow Taco John's during the 1970s and 1980s were Bill Byrne and Dean Neese, owners of one of Taco John's largest franchise groups. Byrne, who was in his late 20s when he opened his first Taco John's, was working as a branch manager of a Dain Bosworth Inc. stock brokerage in the early 1970s. He became interested in the emerging Taco John's concept, and convinced 38-year-old Neese to join him in investing $39,500 to open the first Taco John's outlet in Des Moines, Iowa (one of the first Taco John's opened in a larger urban area).

Byrne and Neese labored to make their first Taco John's a success. Once the store was up-and-running and the Taco John's name began to catch on in Des Moines, they added a second outlet. They added one restaurant at a time, making sure that each store was a success before they opened another unit. In 1978 they opened the first Taco John's that sported both a drive-up window and indoor seating. The unit became a model for the next generation of Taco John's stores. They also helped to pioneer Taco John's mall stores. Over time, Byrne gravitated toward the finance and operations end of the business, while Neese focused on real estate and site location. Both partners also became involved with Taco John's International in Cheyenne, helping to formulate and implement corporate strategy. By the late 1980s, Byrne and Neese were operating ten Taco John's outlets in Des Moines, compared with six units operated by their nearest competitor. Those ten outlets consumed ten tons of beef and two tons of cheese each month.

Also demonstrating the importance of Taco John's franchisees were husband-and-wife team Charles and DeMaris Mathison, the owners and operators of one of Taco John's International's most successful stores. Charles grew up in Rapid City, South Dakota, where his parents operated a diner. After getting a degree in engineering and working in sales for a few years, he and DeMaris purchased a Taco John's franchise in 1976 for the city of Marshalltown, a small city in Iowa. They set up shop in an A-frame building and went to work. The first three years were "tough, real tough," DeMaris recalled in the March 14, 1994 Des Moines Register. "We were both exhausted for three years. One of us was there all the time. He would close one night, and I would close the next."

Despite various setbacks, the Mathisons managed to get the store off the ground by focusing on quality food and good service. They also worked to develop a loyal customer base, and were known for being able to greet more than half of their customers by name. Over time, the Mathisons' Taco John's developed a regular clientele that spanned all socioeconomic groups, from businessmen to laborers whose ethnic heritage ranged from German and Swedish to Hispanic. The couple moved their store to a larger space in 1985, and in 1988 added an atrium that boosted seating capacity to 114. With help from a professional restaurant manager, they were able to grow their Taco John's into one of the most successful units in the history of the company. In 1994, in fact, the Marshalltown Taco John's, after leading all other units in sales volume for four straight years, became the first unit to generate more than $1 million in receipts during a single year.

The efforts of franchisees, with support from headquarters staff in Cheyenne, allowed Taco John's to post big gains. By the end of the 1980s, in fact, Taco John's consisted of a network of approximately 400 units, most of which were located in the upper Midwest and West. Those stores were generating annual sales approaching $150 million. States with the greatest number of restaurants included Minnesota, Wisconsin, Iowa, the Dakotas, Nebraska, and Wyoming. But the chain also had extended into both large and small towns in Missouri, Montana, Illinois, and other states in those regions. At the same time, Taco John's was branching out with units in other parts of the nation, including (by the early 1990s) Tennessee, Florida, Arkansas, and New York.

Taco John's managed to sustain its growth during the 1980s, despite an onslaught of competition that knocked many of its competitors out of the industry. Notable was the threat posed beginning in the 1980s by Mexican-style fast-food behemoth Taco Bell, which at the time was a subsidiary of the giant PepsiCo, Inc. (The beverage firm spun off its restaurant holdings in 1997 as Tricon Global Restaurants, Inc., which later changed its name to YUM! Brands, Inc.) Taco Bell used its parent's deep pockets to fund an aggressive expansion drive, often penetrating markets where Taco John's had long been established. Taco John's executives realized that its franchisees could not compete with Taco Bell on price. Instead, they chose to buck the industry trend toward "value pricing" and stick with Taco John's proven strategy of offering larger portions of high-quality food in an attractive, friendly setting. Taco John's nacho chips, for example, were made fresh in each store, daily. "We'll leave it to the other guys to sell the bite-sized items," said Taco John's president, Pieter Roelofs, in the March 14, 1994 Des Moines Register.

Early 1990s: Rewarded for Franchisee Relations; Changes to Menu and Image

Taco John's also retained its longtime philosophy of establishing win-win relationships with its franchisees. For example, to confront increased competition, the company stepped up its advertising efforts, introducing the new tag line, "More than you imagined," in the fall of 1991, and began working more closely with franchisees to develop multimedia campaigns. Taco John's reputation for treating its franchisees fairly was rewarded in 1994, when Taco John's received the first-ever "Fair Franchising Seal of Approval" from the America Association of Franchisees and Dealers. At the same time, Taco John's was named by Dow Jones's National Business Employment Weekly as one of the best franchise buys in the country.

By 1994, Taco John's was operating 430 units in 30 states. It was still privately owned, and the original founders remained active in the company, although they had handed control of day-to-day operations to restaurant industry veteran Roelofs. Under Roelofs' direction, Taco John's initiated a number of changes in the early 1990s. For example, its menu was broadened to incorporate a variety of new items, including several "Heart Smart" items that used low-fat ingredients. In addition to those newer items were Taco John's more traditional, popular features, such as the Beef Burrito, Taco, Taco Burger, Mexican Style Rice, and various platters and combos. Taco John's also was moving to grow through new distribution channels, such as "Mexpress" kiosks and small food court units.

Going into the mid-1990s, Taco John's was updating its image. Among other moves, the company replaced its longtime logo and character, Juan, a cartoon-like Mexican with a big hat. The new character, dubbed John, was less representative of the stereotypical Mexican image, and "more of a contemporary person who probably has a broader agenda, if you will," according to Byrne. The logo change was part of Taco John's "Image 2000" program, which also included updating the chain's stores with new, brighter colors and completely remodeling the stores. The first franchisee to renovate his stores under the new program was Byrne, who by 1994 was operating 12 units in Des Moines.

New Initiatives Under New Leadership: Late 1990s and Early 2000s

Paul Fisherkeller became president and CEO of Taco John's International in 1997. One of the many initiatives that the new leader implemented--and perhaps the most important--was to promote greater consistency across the chain. Fisherkeller told QSR magazine in November 2000 that when he took the job he found that Taco John's was "the most un-chain-like chain [I'd] ever seen. Changing that has been my mission around here." Under the new CEO, a core menu was developed for the whole chain, and a concerted effort was made to make sure that specific items on the menu tasted the same across the chain. One way to do so was to begin using single suppliers for certain ingredients, such as taco meat or cheese sauce, when in the past two or more suppliers may have been used. On the marketing side, the chain was united around a new slogan, "A Whole Lot of Mexican," which was introduced in 1997. All of these changes were made in close consultation with the chain's franchisees to maintain the good relations that had characterized Taco John's since its founding.

Also in 1997, Taco John's adopted a new prototype for units located in small towns. Traditional Taco John's units ranged from 1,700 to 1,900 square feet, included about 60 seats, and had two drive-through lanes. The new small-town prototype was around 1,200 square feet in size and had less than 30 seats and a single drive-through lane. Designed specifically for communities of 10,000 or less, the new prototype could be situated either as a freestanding unit or in the end-cap location of a strip mall.

Over the next several years the Taco John's chain did not grow in unit terms--in fact the number of stores fell from around 440 in the late 1990s to about 400 by early 2004. Systemwide sales, however, did increase, reaching around $200 million by 2003. This advance through contraction was achieved through the closure of underperforming units and the abandonment of some marginal markets. Taco John's outlined a core area in which it planned to concentrate its growth consisting of 15 states: Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Minnesota, Missouri, Montana, Nebraska, North Dakota, South Dakota, Washington, Wisconsin, and Wyoming. Although the chain continued operating elsewhere, it concentrated its resources in this core territory. Given that sales at fast-food restaurants are driven by advertising, a more concentrated growth strategy would enable Taco John's to get the maximum return possible from its advertising efforts.

Working in tandem with this growth strategy was a shift in the makeup of Taco John's franchisees. Whereas the chain had been built, in large part, on the backs of single-unit franchisees, who might eventually open an additional unit or two, Taco John's increasingly sought out partnerships with multi-unit operators. Many of these new partners were veteran operators of quick-service restaurants who were seeking a new vehicle for growth. So, for example, in mid-1999 Simmonds Restaurant Management Inc., operator of 68 Burger King outlets in Nebraska and Iowa, signed an agreement to develop 15 Taco John's in Omaha, Nebraska, and along Interstate 80 between Omaha and Des Moines. In 2000 several more such deals were reached, such as one with Doug Day, a Wichita-based owner of 16 Burger King franchises, who agreed to develop ten Taco John's in Wichita and Hutchinson, Kansas.

Another important development at Taco John's came in 1999, when Brian Osborn was brought onboard as the chain's first executive chef. Osborn previously served as corporate chef for Frisch's Restaurants, Inc. and the Hardee's hamburger chain. At Taco John's he spearheaded an effort to shift from the use of off-the-shelf products to ones that were proprietary to Taco John's, such as refried beans and tortillas. He also helped develop a new upscale platter line, which included chicken enchiladas, beef enchiladas, and a beef and bean chimichanga, with each entrée accompanied by nacho chips, Mexican rice, and refried beans. In May 2001 Taco John's marked the sale of its billionth taco.

During the early 2000s Taco John's joined the industry trend of cobranded outlets, in which two restaurants occupy a single location. The chain explored this strategy as a possible way to accelerate its expansion, particularly into new markets contiguous to existing ones. Among these were Taco John's operating alongside Noble Roman's, a pizza concept, in Illinois, Kentucky, and Iowa; MaggieMoo's, an ice cream eatery in Omaha, Nebraska; and Steak Escape in Minnesota, Colorado, and South Dakota. In March 2004 Good Times Restaurants Inc. entered into an agreement with Taco John's to develop a cobranded test store in Cheyenne that would include both a Taco John's and a Good Time Burgers & Frozen Custard outlet.

As it prepared to expand by about 25 units in 2004, the year of its 35th anniversary, Taco John's in late 2003 unveiled a new, more contemporary store design that it hoped would facilitate a push into major urban areas, such as Denver and Kansas City. The new design replaced the stucco typically used by most Mexican fast-food restaurants (including Taco John's) with natural stone, did away with other clichéd elements, such as what many called the "Alamo arch," and incorporated new colors. Part of a "reimaging" program for the chain, the new design also was accompanied by the rollout, on a test basis, of new, more authentic Mexican items, such as a shredded beef quesadilla, grilled burritos, a shredded beef soft-shell taco, and new salads. A prototype of the new design was built by the company in Cheyenne, and this was then followed by the first franchise store to feature the new look, located in Pierre, South Dakota. According to Fisherkeller, Taco John's was "putting a fresh face on everything from our building design to our food in order to position ourselves for continued growth in a market filled with generic Mexican fast-food and emerging 'fresh-Mex' quick-service restaurants." Building a niche between these two approaches to fast Mexican food was to be the company's goal moving forward.

Principal Competitors: Taco Bell; Del Taco, Inc.; Chipotle Mexican Grill, Inc.

Chronology

• Key Dates:
• 1968: A high-plains cowboy rancher named John Turner and his wife open a tiny taco stand in Cheyenne, Wyoming, known as the "Taco House."
• 1969: Cheyenne businessmen Harold Holmes and Jim Woodson buy the franchise rights to the Turners' venture; they begin franchising restaurants based on the founders' concept, changing the name to Taco John's, concentrating on smaller towns, starting with Rapid City, South Dakota; Scottsbluff, Nebraska; and Torrington, Wyoming.
• 1978: The first Taco John's to sport both a drive-up window and indoor seating opens in Des Moines, Iowa; this unit becomes the model for the next generation of Taco John's stores.
• 1989: The Taco John's chain consists of about 400 units, generating annual sales of nearly $150 million.
• 1997: Paul Fisherkeller is named president and CEO; "A Whole Lot of Mexican" is adopted as the company slogan; a new prototype store for small towns is introduced.
• 2003: The chain unveils a new, more contemporary store design as it begins targeting major urban areas for growth.