No Quiero Taco Bell

Did new parent drive its Hot 'n Now drive-through burger chain into the ground with bad ideas, or did franchise fail to keep up?
By James M. Richardson, Review Staff

Miami Daily Business Review, Chronicling Money and Power in South Florida, Vol. 73, No. 126, Monday, December 7, 1998

When Richard Loehr decided to become a franchisee eight years ago, he was drawn to hamburger chain Hot 'n Now's simple concept: Burgers, fires and sodas were 39 cents each.  The only add-on was cheese, 10 cents extra.  The concept kept service fast and labor minimal.

But the concept changed several years later when Taco Bell Inc., bought the chain and began adding new food items and procedures.  Now Loehr, who has since closed his business, blames those changes for the failure of his half-dozen restaurants, and is suing Taco Bell for $5 million.  In his federal suit filed in Miami, he accuses Taco Bell of San Jose, Calif., of using Hot 'n Now as a guinea pig to test bad ideas and of ruining what was a proven system.

"Because they didn't know how to run a small system," Loehr says, "they drove the business into the ground."

Nonsense says Taco Bell attorney Lawrence Bemis of Steel Hector & Davis of Miami: "What happened to Loehr's stores is a result of fierce competition in the marketplace."

The dispute involves a common debate between companies and their franchisees: How much can a franchiser change a concept that a franchisee already has bought into?

Michael H. Seid, chairman of the Council of Franchise Supplies and a legal consultant to franchisers, says although such battles are frequent, franchisers often have good reasons for the changes they make and usually can do so legally.

In this case Robert Zarco, of Zarco & Pardo, who represents Loehr, says Taco Bell imposed "its unfettered power on the franchisee without reserving the right to do so.  Taco Bell bought the Hot 'n How system and changed it so much that the system lost its effect on the market, causing my client to go out of business."

At first, the system was simple.  Founded in 1984 in Kalamazoo, Mich., the company was created by William Van Domelen to provide something he thought was no longer available at most fast-food chains: hot food, fast.  In addition to distinguishing itself from national rivals with its pricing, Hot n' Now cut overhead by eliminating salad bars, playgrounds and decorations it didn't need.

By 1990, Hot 'n Now had more than 100 restaurants in 15 states.  In January of that year, Loehr, who had owned two new-car dealerships in Kalamazoo, paid almost $800,000 to buy land and build the first Hot 'n Now in Broward.  Loehr liked the personal attention he got from corporate, and says Van Domelen sent teams to assist him and perform three- to four-day inspections of his stores.  The parent had big plans for South Florida, including a chain in Miami-Dade.

At the end of 1990, however, Van Domelen sold the company to Taco Bell.  Loehr says Taco Bell assured him the buyout would combine the system already in place with Taco Bell's financial resources.

But he started noticing changes in 1992 when, he says, Taco Bell began fiddling with Hot 'n Now's menu.  A quarterpounder and more extras were added to the fare.  The recipe for the patties changed, which altered the flavor in such a way that, according to Loehr, customers thought the meat was burnt.

And there were other changes.  Taco Bell, with its new rules and systems, he says, "tried running the stores without shift mangers, which you can't do in this business, and cut out all promotional materials that generate money, and relied only on giveaways."

When Loehr opened his fourth store in 1993, with a fifth on the way, he says Taco Bell began to distance itself from Hot 'n Now.  Monthly three-day visits from trained inspection teams ceased, as did improvement reports.  By this time, he says Hot 'n Now menu and recipe changes were starting to turn customers away.  What's more, the changes increased labor costs and the time needed to fill orders.  Before, Loehr says, a restaurant would serve 150 cars at lunch and dinner.  Now it could barely serve 100 cars in the same amount of time.

Taco Bell maintains the changes were upgrades.  The company won't comment on the case, leaving its attorney to answer questions.  Bemis says he can't address every change that was made, but says what Taco Bell did "met all contractual requirements."

Profits And Losses

Still, Loehr wanted out. At the end of 1993, after opening a fifth store, he decided to try to sell. "The stores were making money, but the hassles were getting to be too much," he says.  "With a sixth store on the way, I needed to open a headquarters office, which meant more capital up front and more costs."

Loehr says Taco Bell corporate had shown interest in buying the stores, but changed its mind.  He was further angered when Taco Bell wouldn't let him sell the restaurants to another buyer.

Not long after Taco Bell blocked the sale to a third party, Loehr received a letter from corporate stating almost all the company owned restaurants would close for improvements.  That, he says, was a blow.  "Closing down all of the restaurants doesn't send out good vibes," he says.

"Taco Bell knew it was going to shut down the stores, and that's why they refused to approve the sale," he says.

Taco Bell disputes Loehr's claim that the company dragged its feet in buying the restaurants.  "When [we] wanted to buy he didn't want to sell because he thought he could get more if he waited," says Bemis.

Loehr's attorney Zarco claims Loehr wouldn't have begun construction of the sixth site if Taco Bell had told him of the planned closings.  Loehr's suit also alleges that the store closings destroyed his marketing base and forced him out of business.

Bemis says Loehr himself delayed operations.  "He was contractually obligated to develop a sixth store," says Bemis.  "The sixth store was supposed to happen in August 1992, but he waited until January of 1994."

By 1994 Loehr's stores had started to lose money, forcing him to shut down operations in early 1995.  Without counting legal fees and rent, Loehr claims he lost more than $4 million keeping the stores alive from 1993 to 1995.  In March 1995, Loehr sued Hot 'n Now, Taco Bell, Inc., and PepsiCo, Inc.  Taco Bell parent company, for breach of contract and implied duty of fair dealing (PepsiCo Inc., eventually was released from the suit.)

Now, as the case heads for trial this month, Taco Bell no longer owns Hot 'n Now, having sold it to a Connecticut company in 1996.

Taco Bell's Bemis says Loehr just can't accept that the concept was undone by changes in the marketplace.  "Loehr things Hot 'n Now should have continued forever," he says, "but that is not what the market wanted."