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CHICAGO-Del Taco, the Lake Forest, CA-based chain of 445 Mexican quick-service restaurants, made its first foray into the Chicago market Thursday when it unveiled an agreement with its first local franchisees to open 10 stores here. The company, which ranks No. 2 nationally to Taco Bell in the Mexican fast food segment and has ambitious national expansion plans, also raised the prospect of a “taco war” in the Mexican fast-food niche in Chicago.

Thursday’s announcement of the franchise agreement with long-time Chicago-area entrepreneurs Mark Kinnare and Patrick Riccobene came on a big day in the Midwest for 41-year-old, privately held Del Taco, which was scheduled to open its first Detroit restaurant at midnight Thursday following a VIP party at the store. The Detroit store was the first deal put together by Del Taco’s senior director of franchising, Marc Mushkin, who joined the company last year. Mushkin tells GSR that the Detroit restaurant and Del Taco’s first 10 stores in Chicago represent some of the first moves in a Midwest growth strategy designed to expand the chain from its Southern California roots. The first two Chicago restaurants are slated to open within the next six months, one in Algonquin and another in Orland Park.

“Chicago is an obvious market for penetration into the Midwest,” says Mushkin, who explains that Del Taco identified the Midwest generally and the upper Midwest specifically as its primary growth target about two years ago. Besides its size, Chicago was an obvious choice because of the growth of the Hispanic population there, according to Mushkin. He points out that, “Over the last generation, the Hispanic population of Chicago has grown tremendously.”

Del Taco, which sees the potential for “100 to 150 or even 200 stores over the next 10 or 15 years” in the Chicago market, according to Mushkin, is initially concentrating its restaurants along Randall Road in the western part of the metropolitan area and will likely stick with similar suburban locations for the time being. “Del Taco is primarily a suburban brand with drive-through restaurants in suburban centers,” the Del Taco franchising director says. “The western part of metropolitan Chicago looks a lot like the suburbs in the rest of the country, with shopping centers anchored by all of the big national chains, and those are the kinds of centers where we do very well.”

Del Taco isn’t sure of exactly how many restaurants it will ultimately open in Chicago because “The exact number depends a lot on whether we move into downtown into non-traditional sites,” Mushkin says. “Maybe in a few years, we will start to open in the city proper in smaller sites.” For the time being, however, the company expects to add at least a dozen more franchise groups to fill out the Chicago market. In addition to Kinnare and Riccobene, another franchisee is currently developing a new restaurant in the Rockford, IL area that is expected to open in early 2006. Mushkin says a reference to a “taco war” in Del Taco’s announcement Thursday doesn’t mean that the company has any illusions about overtaking Taco Bell in Chicago, at least not anytime soon, but it does mean that “We are going to take them on in some markets in the Midwest where they have had virtually no competition for many years.” Although Del Taco is a distant No. 2 Mexican QSR with hundreds of stores to Taco Bell’s thousands, “We outsell Taco Bell on a per-unit basis by 15% to 20%, so we compete with them very effectively where we do compete,” he says.

Going head-to-head against Taco Bell is really not Del Taco’s focus, Mushkin explains to GSR. He says the chain, which also serves burgers and fries, faces formidable competition from a variety of fast-food, quick-service and casual dining restaurants that are all competing for the fast food customer. Rather than targeting any specific competitor, Mushkin says, Del Taco’s Midwest strategy is part of a national expansion plan with 54 development agreements in place with multiunit franchisees who are committed to opening about 350 stores over the next five years. “By this time next year, we should have another 10 or 15 franchise agreements,” he says, so the total number of new stores planned will be a continually changing number in the coming years.About 60% of the chain’s restaurants are company-owned, but that ratio will probably change to 50-50 by sometime in the next two or three years as Del Taco continues to expand via franchises. This year, the company plans to open 14 corporate stores and 32 franchise locations. The general plan is to grow by about eight to 12 corporate stores per year, along with 30 to 50 per year from franchisees, but the annual number of new franchisee stores could grow to 60 or 70 within the next couple of years. As the chain expands, Mushkin says, the number of company-owned stores will continue to rise but the percentage will decline as franchise locations come to constitute a larger and larger proportion of the business.

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