Memo points to franchisee unrest at Taco BellMemo points to franchisee unrest at Taco Bell

Lisa Jennings

Brewing franchisee discontent at Taco Bell was brought to light this week with the online posting of a memo from a franchise group raising concerns about the chain’s marketing and value strategy.

The 14-point memo from the Taco Bell Franchise Management Advisory Council, or Franmac, was posted this week on the franchise community website Blue Mau Mau, and was described as coming from Tom Cook, who is identified on Franmac’s website as president of the association.

In the memo, Franmac outlined concerns the group had planned to discuss with Taco Bell, including calls for an ad agency review, at a town hall call scheduled for April 21, with the goal of allowing franchisees to be “heard with one common voice.”

Franmac officials declined to answer questions about the meeting and its results or the memo. Calls and e-mails to Franmac board members and franchisees were not returned.

Greg Creed, Taco Bell’s chief executive, also would not comment on specific concerns raised by the posted memo.

“Over the years, we’ve worked hard to become a role model of franchisor/franchisee relations in the industry,” Creed said in a statement. “Open dialogue and robust discussions illustrate the strength of that relationship and are critical to maintaining and expanding our strong brand performance.”

In its memo, Franmac criticized Taco Bell’s marketing and said there was a “lack of public relations” following a well-publicized lawsuit against Taco Bell that questioned the contents of the chain’s taco meat. The group also called for an agency review, saying that advertising over the past 12 to 18 months has been “largely ineffective.”

The Franmac memo comes at a time when Taco Bell parent Yum! Brands Inc. is struggling to revitalize sales among its three brands in the United States.

For the company’s April-ended first quarter, Yum’s U.S. profits dropped 13 percent, and Taco Bell’s same-store sales declined 2 percent, in part because of the negative effect of the beef lawsuit.

Though the suit was later dropped after Taco Bell countered the charges with several national advertising campaigns, David Novak, Yum’s executive chairman and chief executive, described the event as a real “curveball.”

In a recent earnings conference call, Novak said Taco Bell, as the company’s most profitable brand in the U.S., started the year with strong momentum, growing same-store sales 4 percent in the first period. The impact of the lawsuit, however, “lingered longer than we anticipated, given it was an imagined story versus reality.”

Novak noted that heavy users have maintained their loyalty to Taco Bell, but lighter users are staying on the sidelines, which has impacted sales.

He added that Taco Bell will likely fare even worse in the second quarter.

“We believe it will be the low point of the year for the U.S. segment,” he said. “We have not been able to reverse the negative sales trend at Taco Bell. If anything, sales have gotten a little bit weaker since the end of the quarter and it is difficult to predict exactly when we will break this trend.”

In its memo, Franmac also pushed for mandates to be delayed and “allowable impact reduced to 5 percent” until sales return to 2010 levels, plus an additional amount to adjust for 2011 commodities. The memo also argued that “all mandates must have an adequate return on investment.”

Arguing that Taco Bell has a “real or perceived quality problem,” the group called for redeploying resources to focus on the chain’s quality perception and “fixing our core.”

The group also said the brand’s current value proposition is not driving transactions and is “squeezing margins beyond a reasonable tolerance.”

Some of the issues raised by Taco Bell franchisees were similar to those raised by Burger King franchisees in a legal battle over that chain’s value menu. That lawsuit was settled in April after Burger King issued a new policy giving franchisees more say on the value menu and pricing.

Yum has also sparred in court with KFC franchisees over the advertising strategy for the grilled chicken line introduced in 2009. Earlier this year, a Delaware Chancery Court judge ruled that the franchisor and franchisees must work together.

Contact Lisa Jennings at@ lisa.jenningspenton.com.