How Taco Bell Became the Top Franchise in the World

The brand's secret hot sauce is letting its franchisees take risks that lead to innovation. That willingness to entertain big ideas has won the company the #1 spot on our Franchise 500 ranking for the second year in a row.

This story appears in the January 2022 issue of Entrepreneur. Subscribe »

Started franchising: 1964        Total units: 7,567        Cost to open: $575.6K-$3.4M

Courtesy of Taco Bell

It was #1 last year.

It’s #1 again this year. What is the brand’s secret hot sauce? Everything starts with letting the franchisees push innovation.

If you want to glimpse Taco Bell’s vision of tomorrow, head to the frozen tundra of Brooklyn Park, Minnesota. There, just after the snow melts this spring, a sleek new building called Defy is expected to open — but consumers won’t be coming in. The place features no dining room; instead, it will hover over four drive-thru lanes like a spacecraft. Up inside, team servers will cook up tasty Gorditas, Chalupas, and Burrito Supremes and send them down to customers through an innovative food lift system, Jetsons-style.

“The Defy building will be the first one in the U.S. where you actually see the future of what the category will probably look like,” says Mike Grams, Taco Bell’s president and global COO. “And it was not a corporate idea. It came from one of our franchisees.”

Related: Taco Bell is Rolling Out A Subscription Service That Will Give Fans a Taco a Day

That’s typical for Taco Bell, which has a long history of listening to its franchisees — a group that now owns more than 90% of the brand’s 7,000-plus locations worldwide. Even though the franchising industry at large often favors uniformity, Taco Bell has a somewhat different philosophy: So long as the food and service are brand-consistent, any idea is at least entertained, Grams says. Franchisees are closer to their customers than a corporate headquarters could ever be, the thinking goes, which means they see problems first and can develop game-­changing solutions, plus capitalize on whatever makes each local market unique. “There are some guardrails, but they don’t come across as handcuffs,” Grams says. And since the pandemic, Taco Bell has learned that it can move on new ideas quicker than ever. “If you’re a brand that’s looking to go back to normal, you’re going to be behind,” he explains. “It’s going to be constant iteration and change moving forward.”

This is, for example, what already drove the creation of Taco Bell’s Cantina — the brand’s urban, alcohol-serving model that is now in 18 designated market areas and in 27 cities across the U.S. The brand also credits franchisees with massive and consistent growth: Taco Bell U.S. has been on a 14-year run of positive net new units. And through September, Taco Bell Division’s same-store sales were up 12% for 2021. That’s helped drive it to the top of the Franchise 500 list — landing at No. 1 last year, and now holding that spot for the second year in a row.

This same spirit of franchisee collaboration is now shaping Taco Bell’s future, including the development of Defy.

Brothers Jeff and Lee Engler, of Border Foods in Minnesota, came up with the idea for Defy, but it really started with a problem. The brothers have more than 200 restaurants across Taco Bell’s parent company, Yum! Brands, whose portfolio also includes Pizza Hut, KFC, and The Habit Burger Grill, and they were closely watching what they call “the turn-away factor.” “Customers see a long line of cars at a drive-thru and leave,” says Lee Engler. The Englers also realized that people now want a more ­contact-free, digital age experience. Taco Bell had already been exploring ways to improve the drive-thru experience, but the Englers wanted to reinvent it entirely.

They took the idea to Grams, who was intrigued. Grams started at Taco Bell as an assistant manager in 1991, back when the brand was part of Pepsi and 60% of stores were company-owned. Shortly after, the brand flipped its business model to favor ownership by franchisees, many of whom were now able to grow rapidly, and so he’s witnessed the power of listening to franchisees. He met the Engler brothers in Michigan, reviewed a sketch they’d made of Defy, and talked about the Englers’ plan to design and build it. Grams was jazzed. So was Taco Bell CEO Mark King when he saw it. “It was hard to figure out who was going to pay for what, and it ended up being a very expensive project, but never did we hesitate,” says King, “because if this works, it opens up a lot more opportunities for consumers to come through during busy hours and they love the experience and the food coming down. It’s cool.”

Related: He Moved From Pakistan at 18 and Got a Job at KFC. Three Decades Later He Owns a KFC, Taco Bell, Pizza Hut and More.

Throughout the course of the pandemic, Taco Bell has learned an important lesson: Innovation cannot stop, and disruption can be a perfect time to get ahead. The futuristic Defy store is just one example of what the brand and its franchisees have been developing in 2021, and what they all plan to capitalize on this year and beyond. From innovating a customer loyalty program to major menu breakthroughs, Taco Bell has been on a streak that’s as hot as its sauce packets.

Here’s what else is cooking.

Image Credit: Courtesy of Taco Bell

Going 360 Digital

If you go back to when COVID hit, it didn’t exactly play to the strengths of Taco Bell,” says King. “We had a pretty significant dine-in restaurant; we had a very traditional drive-thru. We were not in the delivery business. We didn’t have a loyalty program.” So after stabilizing the business and taking care of its people, Taco Bell did what it has always done best: It listened to its cultlike fan base. Customers said they wanted the brand to be more digital, more mobile. They wanted more access, and true rewards for being so loyal.

Taco Bell responded quickly. It pushed forward on its Go Mobile concept, an idea it had been developing before the pandemic but that it then began to prioritize. Go Mobile stores  have at least one lane devoted to customers who order ahead on the mobile app. They also have “bellhops” taking orders on iPads and geofencing technology to sense when drivers arrive for faster service. By the fall of 2021, the brand had 27 Go Mobile stores with plans for 93 more, and many other locations are  integrating aspects of Go Mobile.

Taco Bell also ramped up its delivery options, with 6,679 stores offering the service through Grubhub, DoorDash, Uber Eats, and Postmates by the end of Q3 in 2021. And for users of its app, it added customized menu options like the build-your-own My Cravings Box, where a specialty item, classic item, side and drink can all be combined for $5. “It gives our fans the flexibility to eat the way that they want to, not the way that the brand is telling them that they have to eat,” says Chief Digital Officer Zipporah Allen.

Related: Taco Bell is Giving Out Free Food to Vaccinated Customers

Next up is something that Allen calls “incredibly disruptive”: It’s the Taco Lovers Pass, a membership-style service that, for $5 to $10 (depending on the location), gives app users a “free” taco every day for 30 days. Members can also unlock secret menu items. By the end of 2021, the brand was testing this in Tucson, Arizona, and plans a larger rollout soon.

All these efforts are paying off. Global digital sales surpassed $1 billion in 2020 and now account for 17.2% of total system sales. “That’s really a credit to the strong partnership that we have with our franchisees,” Allen says.

Image Credit: Courtesy of Taco Bell

Meeting Fans Where They Are

Arguably more than with any other quick-service restaurant (QSR) brand, Taco Bell fans feel a sense of ownership over the menu. That’s why in July 2020 the company honored that passion with a new Taco Bell Rewards loyalty ­program for app users.

Part of this was logistics: At that time, the app helped customers to get in and out of stores contact-free. Then in 2021, as many returned to dine-in, the program was expanded to award points for purchases made at the drive-thru or inside. Users can now scan receipts later from home and still snag those points. But at the heart of the loyalty program is an understanding of modern fandom and a longing for community. It not only offers rewards for free food, but makes customers feel like VIPs with exclusive access to extra deals and first crack at special menu items. “They just want access to the brand,” says Allen.

This sense of ownership can cut both ways, though: When customers are disappointed, they feel like the company owes them a response. In 2020, when Taco Bell’s finances were rocked by the pandemic, it pulled potatoes to help stabilize the business—and “we definitely heard loud and clear that [customers] were not happy,” says Elizabeth Matthews, the company’s global chief food innovation officer. There was an uproar on social media, and even a panicky all-caps “SAVE TACO BELL POTATOES” petition on that got 22,589 signatures. So Taco Bell didn’t just bring potatoes back; the brand used its loyalty program to give members first access. It did the same with the Quesalupa. When that fan favorite menu item returned, app users got it first.

Related: Internet Has Meltdown After Taco Bell Removes Fan-Favorite Menu Item: 'My Life is Over'

By the end of July 2021, Yum! Brands CEO David Gibbs announced that Taco Bell was seeing an overall increase of 35% in active customers in the Taco Bell Rewards Program compared with its pre-loyalty program behavior.

Playing to All Diets

Consumers are increasingly interested in plant-based foods, and Taco Bell is preparing to meet that demand in new and inventive ways.

Then again, Taco Bell has been a welcome spot for vegetarians since the 1960s when people were able to get meat-free black beans, cheesy burritos, and potatoes. In October 2015, Taco Bell even became the first QSR brand to score American Vegetarian Association-certified menu items.

Now it’s stepping up those efforts even further. It has more than 30 AVA-certified vegetarian or vegan options, and developed a Veggie Cravings menu for online ordering. Meat-free items now account for 14% of the brand’s total offerings, up from 6% in 2015. The brand also made it easier to swap veggies for meat at the counter, the kiosk, or on the mobile app.

If you lived near Taco Bell’s California test market in spring 2021 or any of its 95 Detroit-area test locations in October, you might have already tried the brand’s next big idea: It’s a new “Cravetarian” Taco, featuring a plant-based protein made from chickpeas through the brand’s burgeoning partnership with Beyond Meat. Likely in more markets soon, the idea is to make it easy to swap the “boldly seasoned” beef substitute into any of the main menu items — and that’s just the beginning, Matthews says.

“We’re [also] working on a new [meat-free] protein that’s never been seen, not out there. I’m going to keep it a little bit under wraps, but we’re really excited to test that,” she says. Ultimately, all of this is about choice, Allen adds, right down to how fans want to use those sauce packets — and for the record, that’s one squeeze per bite for her.  “Everybody has their own way that they use Taco Bell,” she says. “So we want to tap into those little personal touches in how we’re creating the experience.”

Image Credit: Courtesy of Taco Bell

Rethinking Those Sauce Packets

Taco Bell knows that a growing part of its consumer base is worried about the environment, which is in part why it announced a goal to make all its consumer-facing packaging recyclable, compostable, or reusable by 2025. But here’s the hardest part of reaching that goal: sauce packets.

The company’s Fire Sauce and Hot Sauce packets are so iconic that you can buy pool floatie replicas of them. But so far, the brand cannot figure out a way to manufacture them out of eco-friendly materials. That’s a problem, because there are also more sauce packets produced industrywide each year than there are humans on the planet — 8.2 billion annually for Taco Bell alone — and, used or not, they’re all destined for the landfill.

Related: Te Quiero Mucho: How to Benchmark Taco Bell's Winning Marketing Strategy

In April 2021, Taco Bell took a step toward solving that problem. It became the first QSR brand to partner with TerraCycle, a company that, among other things, collects nonrecyclable post consumer waste and turns it into raw materials. Taco Bell consumers can now create an account on Taco Bell’s website or app, get a box to store their old packets, and mail it to TerraCycle whenever they’d like.

“We’re really trying to make sure that we don’t have any consumers that are missing out on Taco Bell because they don’t feel good about what we’re doing for the planet,” says Matthews. She shied away from giving details but said the brand is engaging suppliers and even competitors who use condiment packets to try to work toward an industrywide solution. The brand is also removing toxic chemicals like PFAS — found in everything from nonstick cookware to waterproof jackets — which the company has already achieved with paper bags and cups. It’s now testing a sustainable packaging suite in San Francisco.

“I want to get there before 2025,” Matthews says. “Innovation is about connecting dots to make these big ideas, but we start with listening and we start with watching. And right now, the consumer is pretty clear,” Matthews says. “They want to have choice. They want to have value. They want to have convenience. They want to have sustainability. They don’t want to feel bad about brands that they’re buying products from.”

Partnering for the Future

What lies ahead for Taco Bell and the QSR world?

Nobody can know for sure, of course, but Grams hopes the past two years have made a statement to Taco Bell’s franchisees: “We don’t just do things to do them because we can. It’s an understanding and a partnership that we’ve got to do it together,” he says. “If you know anything about our history, we’ve had some ups and downs. Many of our franchisees have been through those peaks and valleys. They have it in their DNA. The freakout factor is lower.”

And that, in a way, is a kind of liberty: It means Taco Bell can move quick, have fun, and know that its franchisees and fans are in for the ride.

Related: 20 Facts You Probably Didn't Know About Taco Bell

For example, when its fans were outraged over the 2020 Taco Bell potato famine, the brand didn’t issue your standard mea culpa. Instead, its marketing team called CEO King to, as they said, “run something by him.”

“I was in Scottsdale with my wife, and I get this call,” King says. It was a Saturday afternoon; they were visiting friends. His team pitched an idea: They wanted to superimpose his face on an animated spud, so he could announce that potatoes would be back by March. He’d also hint at the partnership with Beyond Meat with a wink-wink line about going “above and beyond” for vegetarians in the future.

King said yes. Customers were thrilled, though all of King’s golfing buddies now call him Mr. Potato Head. But maybe that’s just the price of success. “I think,” King muses, “what allows [us] to be consistently better than average is that people have a license to say to the CEO, ‘Hey, do you want to be Mr. Potato Head?’ And that’s really what drives a lot of what happens here at Taco Bell.”

Take our franchise quiz to find the perfect match for you.