Ailing Hot 'n Now eyes dual branding as potential salvation

Nation's Restaurant News, April 22, 1996 by Richard L. Papiernik

IRVINE, Calif. -- As sales and unit counts continue to decline at Hot 'n Now, the scaled-down future of the once-prosperous double-drive-thru player may lie only in its potential ability to be double-branded with other concepts.

PepsiCo has outlined no growth plans for the concept other than the pairing of the troubled chain with either Taco Bell units or oil company locations.

At the same time PepsiCo is conceding that Hot 'n Now's shrinking sales and declining number of locations also are taking their toll on parent Taco Bell. In a recent 10K report to the Securities and Exchange Commission, PepsiCo said that Hot 'n Now is "restraining" the Mexican fast feeder's profit.

Much of the loss is due to the inability of Hot 'n Now licensees or franchisees to operate the chain's shrinking number of units. Since October 1995 franchisees have turned back or shuttered at least 65 units.

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Commenting on the 42 units given up by licensees during the fourth quarter of 1995 alone, PepsiCo said in its report that "almost all of these units were closed, deidentified as HNN units and are held for sale."

The units were returned, the company said, "as a result of poor operating results."

Sensing a possible urgency on the part of Taco Bell, some franchisees, according to parties familiar with the operations, have made offers as low as $100,000 for sites that had cost between $350,000 and $450,000 to open. One such overture involved just under 100 units, according to the source who asked not to be identified.

"You could save a lot of money if you did things differently," said one franchisee who asked not to be identified. "Close up one of the drive-thrus, close the walk-up window and you cut your labor costs right there. There are a number of other things, but it has to be done with labor."

However, at a recent meeting with Taco Bell officials, another source said franchisees were told that the Mexican quick-serve chain is working on a program to add the Hot'n Now brand to Taco Bell units. In this dual-branded setting, the Hot'n Now menu would offer hot dogs along with the traditional hamburger and fries items.

Taco Bell also is testing a similar arrangement with Texaco Refining and Marketing Inc. and has a unit set up in Lancaster, Calif., a Los Angeles suburb.

But some analysts conjecture that Taco Bell is only going through the motions to salvage something out of a failed concept. PepsiCo said HNN was "responsible for almost all" of the $103 million accounting write-down against Taco Bell earnings in 1995, which ended in December. In addition, other write-offs were taken for shuttered HNN units.

"When they start taking the write-downs on assets like these," said Terry Bivens, an analyst with Donald & Co., in New York, "it generally is an indication that they may be paving the way to get out [of the double drive-thru business]."

"As far as I'm concerned, this thing is dead," said Mitchell Pinheiro, an analyst with Janney Montgomery Scott in Philadelphia. "PepsiCo always claimed this was an experiment, and it gave them a chance to see what they could learn about the double drive-thru. Now they have learned, and that's why development has all but ceased.

"If they tie in with a service station, they'll find out something else. It's a lot easier to sell bagels to people looking for car-eating food."

Taco Bell officials declined to talk about the details of the HNN finances or operations. Taco Bell spokesman Jonathan Blum also added that there would be no information disclosed outside of what is contained in the latest report to the SEC.

"I really don't know what they are still doing with Hot'n Now," said restaurant analyst Roger Lipton in New York. It has been PepsiCo's folly since day one. PepsiCo is a good company and generally knows how to fix a business, but this one is going nowhere."

Taco Bell and PepsiCo generally have avoided detailed financial reporting on its HNN chain, preferring to fold the details into Taco Bell results. But faced with continuing decline in the HNN chain, as the double-drive-thru segment in most U.S. operations has continued to deteriorate, PepsiCo has begun to provide some additional data dating back to 1994.

Discussing Taco Bell's performance, a recent PepsiCo 10K financial report stated, "Profit growth was restrained by increased losses posted by HNN. ... The profit margin [Taco Bell's] fell almost 1 point to 8.2 percent."

A substantial part of Taco Bell's 62-percent -- about $168 million -- fall in operating profits for 1995 were attributed by PepsiCo to the poor performance at its HNN chain. The HNN problems specifically hit Taco Bell at a time when its profits already were "adversely impacted" by the costs of the Border Lights rollout, according to PepsiCo's 1995 financial report filed with the Securities and Exchange Commission.

PepsiCo conceded that its plan to reduce 1995 operating losses at Taco Bell by having licensees take over the HNN operations from Taco Bell has not been successful in its efforts to rid itself of all the company-owned HNN properties.