Del Taco Franchise Barely Justifies the Cost with Long Payback Period (2024)
Del Taco is an American fast-food restaurant chain that specializes in American-sty;e Mexican food as well as American foods such as burgers, fries, and shakes. The first Del Taco restaurant, under the name “Casa Del Taco,” was opened by Ed Hackbarth and David Jameson in California in 1964. Del Taco shrank and grew in the 1990s, and has been growing since then. Recently, in 2021, Jack in the Box announced that it was acquiring Del Taco. The combined company will have more than 2,800 locations across 25 states.
How Is Del Taco Positioned in the Food & Beverage Industry?
The Food and Beverage Industry is a significant contributor to regional economies and to the U.S. economy. It is a stable industry in terms of employment and labor income due to the consistent demand for food. The food and beverage sector accounts for about 5% of gross domestic product (GDP), 10% of total U.S. employment, and 10% of U.S. consumers’ disposable personal income (DPI). It has total sales of $1.4 trillion, of which $164 billion in value-added is generated by the food and beverage industry alone.
Food and beverage franchises are often the first things people correlate with the franchise industry. Food & Beverage is certainly one of the most popular areas of franchising. Although food franchising is often associated with fast food, the industry also includes fast-casual, coffee, and pizza. Del Taco franchisees have to compete with businesses that offer similar fast-food products. Some examples include Taco Bell, and McDonald’s.
Of the food and beverage concepts we have reviewed, total investment amounts can start as low as $3,000 for smaller kiosk concepts all the way up to $6,732,615 for a full-service location.
What Is the Del Taco Franchise Cost?
The total investment necessary to begin the operation of a Del Taco franchise ranges from $862,700 to $2,136,500, excluding real estate costs. This includes an initial fee of $86,700 to $149,200 that must be paid to the franchisor, which consists of a $35,000 initial franchise fee, $10,000 promotional fee, technical support costs ranging from $1,700 to $3,500, and computer system costs ranging from $40,000 to $62,000. Once the operation begins, franchisees are expected to pay the company a royalty fee of 5% of net sales and a marketing fee of 4% of net sales.
Additionally, Del Taco is operating a Growth Incentive Program that offers qualified franchisees that commit to opening a minimum of five new restaurants a reduction in franchisee fees and royalty fees. Specifically, for the first two restaurants, the franchisees will be waived a $20,000 to $35,000 franchise fee. For the first three years of operation, the royalty fee is reduced to 2%, 3%, and 4%, respectively, and revert back to 5% in the 4th year.
How Much Do Del Taco Franchise Owners Make?
Del Taco provides comprehensive financial performance of its freestanding franchisees from 2016 to 2020. Specifically, it represents Del Taco restaurants that had been operating for at least 12 months, as of the end of the 2016 to 2020 fiscal years. At the end of the fiscal year 2020, there were a total of 301 franchised restaurants. Of those, 279 constitute freestanding franchised restaurants, and 267 of them have operated for more than one year. The freestanding restaurants primarily operated in multiple states, such as California, Florida, Michigan, and Georgia.
Freestanding Franchised Restaurant Average Sales
| Fiscal Year | 2020 | 2019 | 2018 | 2017 | 2016 |
|---|---|---|---|---|---|
| Number of Restaurants (open at least 12 months) | 267 | 232 | 227 | 223 | 221 |
| Average Sales | $1,407,877 | $1,414,604 | $1,404,461 | $1,350,566 | $1,316,732 |
| Number/Percentage of Restaurants Greater than Average | 112/42% | 99/43% | 100/44% | 98/44% | 95/43% |
The average sales is steadily increasing over the years and there are franchisees with large sales that drive up the average. Although Del Taco does not disclose the profit margin for franchise units, it provides the average profit margin for company-owned restaurants, which is 17.78%.
2020 Del Taco Franchise Financial Disclosure:
Average Net Sales: $1,407,877
Average Profit Margin: 17.78%
| Initial investment (midpoint) | %Profit margin of median franchise sales | Estimated Profits | Time to recoup investments |
|---|---|---|---|
| $1,499,600 | 12% | $168,945 | 9.5 years |
| 17.78% | $250,320 | 7.5 years | |
| 22% | $309,732 | 6.3 years |
In 2021, at an average 17.78% profit margin, it will take around 7.5 years to recoup your investment. This is relatively long compared to other franchise opportunities. You may not get a 17.78% profit margin which would elongate getting a return on your investment. The time to recoup investments incorporates roughly a 1.5-year period to scale up the store. This includes finding the location, building the store, passing break even, and then reaching significant income.
Is the Del Taco Profit Worth the Franchise Cost?
Based on our evaluation, the resale price for a single Del Taco is 4 times the estimated profits. If you own a single unit of Del Taco and a profit margin of 17.78%, the unit would sell for $1 million, which is lower than the midpoint investment of $1,499,600. Additionally, Del Taco franchise owners who operate a multi-unit system can sell the system at 7 times the estimated profits. So, if you had 5 Del Taco franchises, this would be $1.7 million.
How Many Del Taco Franchised Units Have Opened and Closed?
| State | Year | Outlets at Start of Year | Outlets Opened | Outlets Sold to Franchisee | Terminations | Non-Renewals | Outlets Reacquired by Franchisor | Outlet Ceased Operations for Other Reasons | Outlets at End of the Year |
|---|---|---|---|---|---|---|---|---|---|
| Totals | 2018 | 252 | 12 | 0 | 0 | 0 | 3 | 3 | 258 |
| 2019 | 258 | 14 | 31 | 0 | 0 | 4 | 3 | 296 | |
| 2020 | 296 | 7 | 6 | 0 | 0 | 0 | 8 | 301 |
The number of Del Taco franchised units is steadily increasing over three years. In 2020, there were 7 units newly opened, 6 sold to franchisees, and 8 units that ceased operations, resulting in a failure rate of 4.65%, significantly lower than the industry average. In 2020, there were a total of 301 franchised units and 295 company-owned units in operation. This proves Del Taco a viable business model to follow, especially during the COVID-19 pandemic.
Conclusion
Del Taco can be an interesting concept to invest in 2022 as a first stop in the fast-food industry. Although with a viable business model, prospective franchisees may face a long payback period. Although Del Taco is promoting franchisees to operate multi-unit systems, the return on the resale of multi-unit Del Taco stores is unpromising.
