Taco Bell's new menu goes for a cheap fill

— -- Taco Bell may be emerging from taco hell.

It hasn't been easy. There was the E. coli outbreak in late 2006 that sickened 70 and closed dozens of restaurants. Then, the rat infestation at a New York City unit in 2007 that became an Internet must-see.

Wednesday, the image-challenged chain — which has slowly but methodically regained its footing — will detail a 2008 product game plan that could nudge folks to forget the past and instead drive into Taco Bell in droves: cheap eats.

We're talking really cheap.

The same chain that turned the fast-food industry on its head back in 1990 when it introduced cut-rate, 59-cent, 69-cent and 79-cent menu items is about to do it again. Taco Bell on Thursday is rolling out its "Why Pay More?" value menu with 10 products — four of them new — priced at 79 cents, 89 cents and 99 cents.

For Taco Bell, the timing could hardly be better. The battered economy has sent much of the $558 billion restaurant industry tanking. After staying above the fray for months, the fast-food industry finally succumbed in March, when sales at units open at least one year dipped about 0.5% compared with the same period in 2007, reports research firm Technomic. Taco Bell's move also comes just ahead of the frantic summer season, when fast food bags more sales than any other time of year.

There's never been a better time to brag — and to brag loudest — about selling cheap grub. McDonald's is hyping $1 Double Cheeseburgers in some markets. KFC is hawking 99-cent Snackers. Subway and Quiznos are waving $5 foot-long subs.

"The tough economy plays to Taco Bell's strengths like no one else's," says Dennis Lombardi, a restaurant industry consultant. "This gives them something to shout about."

It might force the rest of the fast-food industry to take a second look at their own value items. But it will be extremely difficult for burger-heavy McDonald's and Burger King to match cheese-heavy Taco Bell.

Marketing blitz

The chain's image of cheap eats will be all over the tube as it unleashes TV spots this weekend that feature folks hunting for loose change — under couches, inside car cup holders and in their pockets — to pay for food at Taco Bell.

"This taps into the fundamental problem that many families are facing: Do I put gas in the car or feed the family?" says Greg Creed, Taco Bell's president, in his first extensive interview with a national publication since he took over nearly 18 months ago. With Taco Bell's new value program, he says, families can afford both.

But Taco Bell's not stopping there. It's doing this in tandem with a new, $1.89 frozen-fruit drink, Fruitista Freeze, with all-natural flavors and sliced strawberries on top.

Instead of using corn syrup as a sweetener — an ingredient that concerns a growing number of consumers — the drink is sweetened with sugar. The goal is to lure consumers back into the store for snacks from 2 p.m. to 5 p.m., when business is typically at a lull.

Taco Bell continues to roll out its Fresco Menu of nine mostly lower-calorie items, each with fewer than 9 grams of fat.

In total, this will be Taco Bell's largest product rollout — and its biggest marketing campaign, says David Ovens, the chain's chief marketing officer.

"They're coming out with their guns blazing," says David Palmer, restaurant analyst at UBS.

But by taking on so much in such a short time, Taco Bell could be playing with fire. "They are trying to do a huge amount very quickly," warns Barbara Brooks, a corporate consultant. "It could overburden franchisees with way too many new things at once."

Then, there's the issue of whether cheap eats cheapen a brand's image.

Steven Addis, CEO of Addis Creson, a brand consultant, says that's the risk with Taco Bell's new value menu. "It may produce short-term gains. But in the long run, it's a disaster to brand equity," he says.

The new value offerings:

•At 79 cents: Triple Layer Nacho — topped with red sauce, beans and nacho cheese sauce.

Melted Three Cheese Roll-Ups — flour tortilla with three cheeses.

•At 89 cents:Cheesy Double Beef Burrito — a warm flour tortilla filled with two portions of seasoned beef, Mexican rice and nacho cheese sauce. This is expected to be the top seller and will be matched up against McDonald's Double Cheeseburger.

•At 99 cents:Big Taste Taco — a flour tortilla with beef, lettuce, cheddar cheese and crunch strips.

The key to the program, says Creed, is that Taco Bell is separating itself from the other fast-food $1 menus. "Compared to us, the rest of the category is one dimensional."

Sales of the value items have been brisk in test markets, Creed says. Taco Bell executives sensed they had a huge hit after speaking with one female customer in Bakersfield who gushed: "This is the last affordable fast food."

He-man loyalty

But it's young men — not women — who are Taco Bell's target. Young, hungry guys — many of whom can barely grow stubble on their chins — are Taco Bell's repeat customers.

"These are guys who only care about getting their food quickly and cheaply," says Gene Grabowski, a crisis-management expert who knows the inner workings of companies trying to repair their images. These 16- to 20-something customers, he says, "will sacrifice food safety, nutrition or whatever just to save a buck."

Which may help explain why Taco Bell didn't suffer an even bigger hit after its two very visible black eyes over the past 18 months.

First, there was the E. coli virus in the Northeast in December 2006, which shut down dozens of restaurants after Taco Bell customers in five states got sick.

It took 10 days to finally determine that the problem was from a supplier whose lettuce was tainted. Taco Bell's parent company, Yum Brands YUM, has since hired a third-party tester to verify lettuce quality at the farm, before it reaches the restaurants.

Then, in February 2007, a TV camera crew in New York City discovered rats at a New York City KFC/Taco Bell and filmed through the restaurant's window. In an almost surreal scene, a dozen huge rats were filmed racing around the restaurant.

More than 1.2 million You Tube viewers watched clips of the rats at play.

Creed says it was construction under the restaurant that stirred up the rats. In any case, the restaurant was closed and never re-opened. Taco Bell has since set up third-party audits not only for food safety but for pest control.

After the PR double-whammy, Taco Bell was stymied, but not knocked out. Taco Bell's same-store sales for the first quarter of 2007 fell 11%. But it could have been worse. More recently, Taco Bell has had a modest rebound. Sales are up for the past three months, Creed says, though he declines to say by how much.

Just days after the E. coli mess, Taco Bell's "brand favorability" with consumers fell to 68%, according to a national, online survey of 400 consumers done for Taco Bell by a third party. The number rose to 83% in a survey taken roughly one year later. And consumer "purchase intent" has risen from a low of 74% right after the E. coli issues to 83% in a survey taken in November 2007.

Why pay mo'?

Somebody's buying tacos. Yum, which also owns KFC and Pizza Hut, rarely breaks out Taco Bell's numbers from the overall restaurant group. But in the first quarter of 2008, same-store sales for the combined Yum brands were up 3%, the company reported.

Considering how rough things were one year ago at Taco Bell, "They're lapping easy comparisons," notes analyst Palmer. But even then, he says, "The brand seems to have found its footing."

There's money to be made in tacos. Even in a tough year. Taco Bell's U.S. sales exceeded $6 billion last year, up 0.8% from the year before, estimates Technomic. Both KFC and Pizza Hut posted U.S. sales declines last year, Technomic says.

For Creed, it's been one wild ride. The first E. coli incident took place just two days after the former chief marketing officer took over as president.

"It certainly was an interesting start," Creed says. Days after he was named president — and the E. coli mess became headline news nationally, "My job was to reassure shareholders, customers and employees that this great brand was capable of rebounding."

Then came the rats two months later.

"In life there are ups and downs," Creed says. "I decided that I'd have all my downs in the beginning of my presidency."

Now, Taco Bell is trying to come off as fast food's version of the white knight. "Value is the core of who we are," Creed says. "We decided that we needed to get ahead of this one."

The native Australian hired Ovens, another Aussie, as Taco Bell's chief marketing officer last summer.

Besides the ad campaign, Ovens is overseeing an online component that encourages consumers to customize rap songs via the "Why Pay Mo' Rhyme Generator" — and e-mail to friends.

In test markets, Ovens says, consumers didn't just buy the budget items. The "vast majority," he says, bought other items as well.

That's one reason the chain can afford to charge so little for its value items. The other reason, Creed says, is that Yum Brands buys more commodities globally, such as cheese and chicken, than just about anyone. So it can negotiate lower prices on key ingredients even with commodity prices at record highs.

For Taco Bell, it's a gamble, but one that might be worth taking. By hawking items for 79 cents, Taco Bell isn't only thinking outside the bun, it's arguably thinking outside the entire fast-food industry.

"When times get tough, you can build a moat and walls around yourself — or go on a massive land grab," Creed says. "We're going on a massive land grab."