How Taco Bell beats McDonald's with just 8 ingredients

Taco Bell serves 42 million Americans each and every week, making it the undisputed king in Mexican fast food in the United States. But here's the crazy thing. They do almost their entire menu with just 8 ingredients, and that gives them profit margins that are better than even McDonald's. This video explains how Taco Bell is the most efficient fuel delivery machine America has ever built.

Oh, and by the way, Thanks to Homebase for sponsoring this video. More on them later.

By the way, I turn each and every single one of these videos into a one-page cheat sheet you can download alongside it. Girdley.com/youtube. It all starts with a guy named Glen Bell, who was born back in 1923. He served in the Marines in World War II, and he came home absolutely broke. Opens Bell's Drive-In back in 1948, directly across the street from the original McDonald's. Serving hamburgers and hot dogs. He watches the McDonald's brothers daily, studies their every single move. He watches their systems they create and realizes, I'm never going to be able to outburger these guys. And he finds the answer not far away. He turns his head 45 degrees and sees something across the street. And that thing is the Mitla Cafe run by the Rodriguez family. They have lines out the door selling hard-shelled tacos. But there's a problem for the Rodriguezes. Every taco is cooked to order, meaning when somebody walks in, they have to cook it right then. And if a crowd shows up at once, they can't scale. And the biggest part of that problem is the hard shell taco itself. So Glenn, being an entrepreneur, decides he's gonna precook and pre-fry all of those hard shells before anybody shows up. What used to take minutes or even dozens of minutes to create an order before, now could be done in seconds. That one operational decision would become the entire foundation of why Taco Bell became what it is today. Bell opens 3 different concepts: Taco Tia, El Taco, and eventually Taco Bell. And he opened that first Taco Bell on March 21st, 1962, in El Downey, California, a town I had never heard of. And the first tacos, well, they sell for $0.19. And Glen wanted to go big, so he started to sell franchises. The first one opened in 1964. By 1967, there would be 100 franchise Taco Bells. He would IPO the thing in 1969 with 325 stores. Interestingly enough, one of his early employees would leave to start Del Taco, which eventually became a pretty popular California chain on its own. But that didn't matter. Taco Bell would still keep winning. By 1978, the entire chain had 868 restaurants. He would go on to sell the entire thing to PepsiCo. There would be $125 million or so in stock, a fact that would come back to haunt the entire story. Right after PepsiCo buys the chain, they install a new professional CEO. That person notices something that nobody had figured out until then, and he finds it exactly in their kitchen. And that one fact and insight would go on to make Taco Bell the most profitable kind of fast food chain almost in the history of fast food. And that guy's name was John Martin. PepsiCo had installed him to run the entire Taco Bell chain. And look, this is peak of factory food America. Back then, everybody thought this was a good thing. If we are mass-producing food, we get more calories into people at cheaper prices. Uh, later on in the 2000s, we would start to realize this kind of attitude was making us sick. But back then, well, this is the way they operated. And John walks into a Taco Bell and asks a fundamental question: Why are we cooking so much food here? He saw people chopping lettuce, cooking meat, Basically doing everything but serving customers. Martin's idea would eventually be called K-minus. The idea that everything would get prepared and cooked someplace else and it would just show up at the local Taco Bell and get assembled behind the counter. This meant things like pre-prepared shredded beef, shredded chicken, lettuce, shredded cheese. Basically they didn't want any cooking going on inside of the restaurant. In restaurants, real estate is king, and in this case this allowed them to do something pretty crazy. Whereas before the kitchen might be 70% of their in-restaurant footprint, that flipped and suddenly became 30%, with 70% made up for dining. Or perhaps they could just build smaller stores. Gordon was in fact saying that Taco Bell wasn't actually in the restaurant business. They were in the food assembly business. And nobody had noticed this one kind of particular thing in history. And this particular insight turned out to be revolutionary at the time. But the next insight was going to be something unique to Mexican food.

But before we get into that, I want to talk about today's video sponsor, Homebase.

Homebase.

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There's a funny comedian, I watched her recently, and she just did a bit where basically if you look at every single Mexican food item that we typically eat here in the United States, it's the same stuff. It's some version of a tortilla with shredded meat on top of it, some shredded cheese, lettuce and tomato, maybe a little pico on top. And if you look at everything that Taco Bell sells, they come down to these same kind of 8 ingredients. Some version of a tortilla, some cheese, some meat, some lettuce and tomato, maybe some sour cream if we're feeling crazy. Oh, and I forgot rice and beans too. But everything, even the damn Doritos Locos Tacos, same stuff, just slightly different flavored tortilla in that case. You want a chalupa? Well, that's a flat tortilla made crunchy, a little bit of cheese, some meat, lettuce and tomato. You got a chalupa. You want a taco? Same thing, just swap out the hard shell flat chalupa for a soft shell taco tortilla. If you compare that to a McDonald's, they have hundreds of different SKUs, different things, prep stations going on. You go in the back of one of those things, it looks like they're about to launch the space shuttle. But here was Taco Bell, suddenly walking into a magical environment, which is the concept of Mexican food, at least is here how we eat it in the United States, is very few ingredients just reassembled in different ways. Most companies, when they go into business, gravitate towards complexity. They just keep adding things. And look, that's natural. Individual employees, they wanna make their jobs more complex. And why do they do that? Well, job security. Great CEOs know that this is the possibility, and this is human nature. So what they do is push the organization wherever it is possible to simplify and take out steps and things. And here's Taco Bell, an entire organization built around that concept. We talk on this channel about defensive moats, the things that your competitors can't compete against. Imagine McDonald's trying to offer high-quality tacos. They're not going to be able to do it. It's just not in their DNA. Here, Taco Bell made simplicity their entire reason to exist. And a huge benefit for Taco Bell is lower food cost. Their waste is 2 to 4% of total ingredient costs. A typical restaurant like a McDonald's might be closer to 10%. And the beauty of simplicity is it keeps making everything else around it easier. Fewer ingredients, well, suddenly that makes it much easier to train newer employees. And if turnover is happening to you, it's going to be less dangerous to your bottom line. Uh, normally we're in a San Antonio forest, but, uh, if you can guess where I am, this is definitely not San Antonio. We don't have hills like this. Let me know in the comments below if you know where I am, and bonus points if you can tell me what trail it is specifically. It's got a pretty famous name. Anyway, to continue on with the simplicity thing, let's say you want to introduce a new menu item. Do you have to bring in a new supplier? Do you have to fly out to them and do a new contract? Do you have to train your employees or make space in your refrigerators? No. You're Taco Bell. Simplicity is the game. You just repackage and reformulate the same ingredients you're using for everything else, and you end up with things like the Doritos Locos, uh, which I don't know why people would eat that, but they do. The average Taco Bell does about half of a typical McDonald's. While they do less revenue, They're much more profitable on a per-store basis. And most people think that Taco Bell wins because it's cheaper. Turns out that they actually do things with their menu that competitors can't even think about doing. In 1990, they brought out one of the very first value menus. 59 cents, 79 cents, 99 cents. 59-cent tacos, 79-cent burritos, 99-cent, well, whatever they called specialties, which was just random other concoctions. 59, 79, 99. Taco Bell's done it again. Run for the border. This would predate what McDonald's would do with their value menu by over 14 years. The reason was, well, Mexican food can be recombined into smaller portion sizes. Try to— but try to sell somebody a tiny hamburger. Well, they're going to make fun of you if you're McDonald's. After this invention, same-store sales would go up 60% over 3 years. And under Martin's tenure over the next decade plus, they'd go from 1,500 Taco Bells to over 7,000. Oh, hilarious story for you, by the way. At one point I had relatives that lived in Fort Lauderdale and we're going on the Intracoastal Waterway, which is like this little area where boats can go behind a barrier island. We passed this house and it has a big bell in front and it looks like a Taco Bell. And I turned to my relative and I said, "Whose house is this?" And they said, "Oh, that's the guy who founded Taco Bell. He was so into it, he made his whole house look like a Taco Bell in Florida." It was pretty cool. In 1997, Pepsi decided they didn't want to be so much in the food business anymore. Remember, they had gotten into it because they thought it would be a way to lock up and sell more, basically, Pepsi to people. So they spun off Taco Bell, Pizza Hut, and a couple other restaurants including KFC into something called Yum Brands. The first thing they did was go down the path of becoming almost all exclusively franchising, and today 94% of Taco Bells are franchised in the United States. We've talked a lot on this channel about how beautiful the franchising business is. It's basically an IP licensing business, and in some cases it becomes an IP licensing business where you rent people the brand and the recipes and the system, and all you do is sit back and collect royalties on that, meaning payments off the revenue. Meanwhile, the franchisees are the ones investing all the capital and they're the ones taking all the risk. Well, most of it at least. And you just sit around and take a percentage of the sales. It's a beautiful business up there with software and music and a lot of the other good ones in life. Yum! Yum! over this period of years would own both KFC and Pizza Hut alongside Taco Bell. But there was something magical about Taco Bell. In some years, nearly 40% of Yum! Brands' profits come solely from Taco Bell. It's that good. And one thing I haven't mentioned that makes Taco Bell so awesome, and Mexican food is one of the few foods that do this one thing, which is many of the ingredients taste better the longer you go from cooking them. If you look, for example, at a steakhouse, Imagine the times you've gotten a takeout steak and it gets delivered to your house an hour after it's cooked. Doesn't taste as great as when it comes straight off the grill. But the exact opposite thing happens with Taco Bell. Take refried beans, for example. Heck, the whole idea is you're just cooking beans a second time, and it makes them taste even better after they sit overnight. Rice, beans, shredded pork— they all taste actually better after they've been sitting overnight. This allows them to help with that food loss problem I talked about before. Again, the magic of Mexican food, or at least Americans' version of it, which is definitely not as good as real Mexican food. By 2010, the Taco Bell brand is starting to look kind of stale. Type of place that college kids would go to when they were drunk in the middle of the night. Heck, a lot of us did, including me. Marketing campaigns had been around that stupid chihuahua. In fact, somebody had actually sued around that chihuahua. Kind of nuts. It's wild! Only at Taco Bell. Chipotle and Panera are fast casual concepts. They're starting to make Taco Bell look like it's old school and out of touch with the times. People are growing out of the idea of factory food being what they want to eat. That's why as the 2010s started to come in, same store sales started to flatline at Taco Bell. It looked like they were headed for, well, eventual extinction. And that's when a new CEO, a guy named Greg Creed and a guy named Brian Nichols, who you may recognize as the guy who stepped up to save Chipotle later that decade. They came up with a crazy bet the company idea. They launched two campaigns in succession that are hugely popular. The first one is Think Outside the Bun. The second one, Live Más. In 2012, they decide to stop competing with McDonald's on price. Instead, what they're going to do is compete with Starbucks and Chipotle on culture. Same cheap food, but a better idea behind them. That's what these two campaigns are trying to do. Interestingly enough, Nichols would later go on to run exactly the opposite playbook to try to save Chipotle in a world a decade later that had substantially changed for the opposite. But at this moment, Taco Bell went out and succeeded in making it seem like being cheap was, well, a desirable lifestyle. But here's the deal with messages. You can only go so far with them until your product needs to back it up. And that's why in 2012, they brought out a thing called the Doritos Locos Taco. To bring it to market, they had gone through over 40 different prototypes with Frito-Lay. There was a problem. All that orange dust kept flaking off. Launched March 8th, 2012, and $100 million worth of Doritos Tacos Locos sold within the first few months. After the first 19 months, they would sell over $1 billion worth of Doritos Tacos Locos Tacos. Just loco, I guess. That caused their single restaurant sales in Q2 of 2012 to be almost the single largest quarterly jump in history. Almost 13% increase. They had to hire 15,000 new employees to keep up. But here it was, just the same 8 different ingredients recombinated a different way, just with a different wrapper, different brand, and a little orange dust on it. And Frito-Lay itself is a $3 billion a year conglomerate with a huge marketing budget. That's how they get us to keep buying that crap. And here was Taco Bell playing that whole thing through the partnership. And leveraging their marketing machine. You can see how the flywheel all works. They have a simplified menu that turns into a simplified production scheme that allows them to be super creative and get new products out to market fast. That in turn brings in value shoppers who can get products for cheaper. They're happier, which means they shop more, which means the franchisees who own the restaurants make more money, which means they're willing to invest more money in the whole thing, which means the whole chain grows faster. Which means, well, Taco Bell prints money. The beautiful thing about this flywheel is as each part of it gets stronger, the rest of it accelerates, and that creates an advantage that makes it harder and harder for competitors to compete against you. One of the things you start to see in business is how rare it is when something magical like Taco Bell comes along. And even when a business that you own kind of works at a smaller scale, the older you get in business and see how hard it is, the more you appreciate something like that when people are catching lightning in the bottle. And here, Taco Bell is a perfect example of that. The VCs out in Silicon Valley who put a lot of money into high-growth companies refer to moments like that when everything seems to be so easy and money keeps flying at you no matter what you're doing. Well, they can consider that a thing called product-market fit. And that's exactly what Taco Bell has. There's more that I haven't talked to you about. I'm basically Ron Popeil on the side of a mountain. If you know who Ron Popeil is, infomercial king. Pretty cool. But there's one more thing that Taco Bell has figured out that nobody else has been able to crack. And that's a thing called the fourth meal. Most chains by this point have figured out they need to service at least 3 meals: breakfast, lunch, and dinner. But Taco Bell is unique amongst them. It almost universally stays open till 2 or 3 in the morning. Much like Red Bull kind of created the entire category of energy drinks and defined it themselves in a way that would, well, basically create an amazing business, Taco Bell did the same thing. Before them, they hadn't even— people hadn't even really thought about the idea of a 4th meal. And look, maybe a 4th meal had been something you and your drunk college friends have done when you're driving through, slurring your words in the backseat of a friend's car, asking for a 7-layered burrito. But in this case, Taco Bell was the first one to make it part of their core identity. What they're going to be is a chain. 30 to 35% of Taco Bell sales happen after 8 PM. That's the highest of any chain. In other words, everybody else is only selling 3 meals a day. Taco Bell is selling a 4th one. And those late-night shoppers turn out to be incredibly profitable. You know, they don't price shop because there's no place else open. You ain't going through McDonald's at 1 in the morning. Here, Taco Bell has made their entire existence incorporate a fourth meal. Many other chains aren't even legally permitted to stay open late. Similarly, Taco Bell has managed to stay up with the times. 35% of customers are loyalty members and they tend to spend almost a third more than your average customer.

And on the marketing side, they understand their cultural relevance. In 2019, Taco Bell decides to take over a hotel in California. The whole stunt would sell out in 2 minutes, generating nearly $20 million in earned media, basically free news coverage. In 2022, they had decided to discontinue the Mexican pizza. People got mad. An online petition— people demanded it come back. So what did Taco Bell do? They didn't apologize. They just brought the thing back and turned that whole tragedy into a success for them. The relaunch would sell out nationally for the next 2 weeks. 7 times the projected demand. They're doing other stuff like waiting for LeBron James to talk about Taco Tuesday, fighting over trademarks with smaller chains and winning. They're doing what they're calling elevated cantina locations in Las Vegas and Chicago. I went to one in Denver, actually. It was kind of weird, but you see what I'm getting at. They're trying different formats and being aggressive.

And the game Taco Bell is playing here is one that elevates above food. They're not trying to compete with Chipotle on the quality of the tacos. They're trying to compete with Nike for cultural relevance. They're innovating in terms of the footprint of their stores. They released one called the Defy store in Minnesota. Basically has this like weird elevator thing and super duper drive-thrus so people can get in and out in like 2 minutes. And that means all their competitors like Del Taco, one of the number 2 chains, is way behind. They have 600 stores. Taco Bell, 7,800. In this town, which by the way, is still open if you're going to figure out where I am, That is ridiculously expensive real estate. Makes you wonder how many franchisees of Taco Bell who own 10 or 15 stores are owning property down there. That's where your taco money goes, guys, into rich people's real estate. Oh, and for the record, we don't own real estate here. We are renting. Qdoba, Moe's, Chipotle, they're all playing different games about food and nobody's ever managed to play the game that basically Taco Bell plays, which is it's about the culture. And it's about the systems. And so that's why today Taco Bell is the unquestioned king of Mexican fast food. $15.6 billion in system-wide sales. 35% of customers are digital loyalty members. And remember how Glen Bell had taken all that stock from PepsiCo when he sold to— sold in what eventually became Yum! Well, if he'd have just left all that money in there, the $125 million they paid him, it would've been worth over $1 billion today. I think the coolest thing about the Taco Bell story is you look at what they've done over the past 15 years, and this was a group of people that was never satisfied. They were already number one. They decided they wanted to be crazy number one, bigger than everybody else by a magnitude. This is a really hard thing to do in business. When you get to be a certain size, you get to have a certain level of success, it's easy to say that's enough and get complacent. The reality is businesses are either making themselves better or they're slowly dying. There is no in-between. And here was Taco Bell that year after year, decade over decade, did something that's incredibly difficult, kept working, kept grinding and making themselves incrementally better each and every year. Eventually, that grind allowed them to start playing games that nobody else could, say, being part of the culture rather than just slinging tacos. The challenge for each of us is if you're going to be running a business for 10 or 15 or 20 years, which is kind of how your mindset should be, right? Magic happens over decades, not over single years. The challenge for you or I is how can you maintain that level of discipline over those decades and end up in a kind of a beautiful place where Taco Bell has ended up? All right, if you enjoyed this, let me know in the comments below. Tell me good job and encourage me to make more, and, uh, maybe I can afford to take you to more bougie places and record videos with better backgrounds.