Jack in the Box faces a long road to recovery following the failure of its Del Taco acquisition and other missteps.
Now, the fast food giant is in “survival” mode as it pays down debt and gets back to basics, said Nick Setyan, managing director and senior equity research analyst at Mizuho Americas.
In October, less than four years after acquiring Del Taco for $575 million, Jack in the Box sold the chain to a franchisee for a paltry $115 million. Both brands have struggled to increase sales in recent years, with Jack in the Box posting its worst sales performance in years over the past two quarters.
The San Diego-based burger chain sold Del Taco to pay off debt and focus on improving its core business. It’s part of the company’s turnaround plan — Jack on Track — which includes discontinuing dividend payments, closing 150-200 stores and curbing company-owned development. The company’s total debt at year-end is $1.7 billion, with a debt-to-cash flow ratio of 6:1, one of the highest in the industry.
The sale made sense for both brands, as Jack in the Box couldn’t afford to invest “the incremental dollars” necessary to turn around Del Taco’s dismal performance, Setyan said.
Was Del Taco ever a good fit?
When Jack in the Box bought Del Taco the burger chain planned to refranchise Del Taco’s corporate stores.
But those plans never came to fruition.
During the early-pandemic QSR boom, Jack in the Box’s management held out for more favorable franchise development agreements, demanding that franchisees agree to build new stores in addition to acquiring company-owned units. It turned out to be a miscalculation, as franchisees sat on the sidelines waiting for market conditions to stabilize.
“They were trying to drive a harder bargain than they probably should have,” Setyan said.
Jack in the Box also overestimated the synergies between the brands, said Philip Daus, partner and head of the Houston office at Simon-Kucher. There were fewer opportunities than expected to integrate and streamline the brands’ supply chains and tech stacks, as well as fewer opportunities for cross-promotion.
The burger chain also underestimated the necessary integration costs and failed to “pressure-test” its assumptions about market conditions, including food and labor costs and tariff rates, Daus said.
Making matters worse, Jack in the Box has long-standing problems it should have addressed before trying to grow through acquisition, according to Daus.
"Before you start to scale, you have to sequence the value creation,” Daus said. “For years [Jack in the Box] has had opportunities on the value side that haven't been addressed. They're not being addressed right now.”"
Del Taco also abandoned its focus on value during COVID. Before the pandemic, the brand positioned itself as “Taco Bell but cheaper with better ingredients,” Setyan said.
But Jack in the Box raised prices during the pandemic to boost profits, betting that lower-income consumers would be able to pay the difference thanks to stimulus checks, rent freezes and higher wages.
“That worked for about two to three years,” Setyan said.
By the time consumer behavior began to normalize toward the end of 2023, Del Taco had raised prices too high for many of its core consumers.
“All of a sudden, they realized that Del Taco had gotten way too expensive,” Setyan said. “As a QSR, you can't ever shun value. You have to remember that the entire reason for your existence is meal replacement.”
Other QSRs, including McDonald’s, made similar pricing moves, and have since shifted back toward value.
But the Jack in the Box and Del Taco marriage made the pricing miscalculation especially painful. In addition to Jack in the Box having significantly more debt than many of its peers, the burger chain and Del Taco share a similar footprint. Forty-three percent of Jack in the Box stores and 61% of Del Taco stores are in California. By comparison, just 11% of Taco Bell stores are in California.
As a result, Jack in the Box and Del Taco had far more serious exposure to California’s $20 fast food minimum wage than most of their competitors, which hurt profitability.
“Wages doubled for limited service,” Setyan said. “It's going to be really tough to try to regain that value position that Del Taco really had historically, given some of the structural cost changes that we've seen.”
Jack in the Box’s burger business also means that the company has had fewer options to control costs as beef prices surged.
Those two factors make it harder for Jack in the Box to compete with other QSRs, which is why it had to unload Del Taco.
“You got beef inflation on one side, you got labor inflation on the other, and you have zero ability to take pricing because you're in an escalating price war,” Setyan said.
Jack in the Black?
Food and labor prices continue to rise, putting Jack in the Box in a bind as it tries to dig itself out from a mountain of debt and return to profitability.
“They’re in this catch-22 situation where they’re getting squeezed from the top and the bottom,” Setyan said.
Initially, Jack in the Box should focus on value and right-sizing the menu, Daus said. Simon-Kucher's benchmarking study of 13 major QSR burger chains found that Jack in the Box has one of the most overloaded menus in the industry with narrow price-point coverage (missing both premium and value segments), inconsistent pricing across locations and weak digital/loyalty capabilities.
Simplifying the menu could boost sales and reduce operational challenges.
“The upsell paths are not clear and, on top of that, the operators don’t want to produce some of the items on the menu because they’re so complex,” Daus said.
A consistent pricing strategy would also make it easier to raise margins.
“Pricing is the number one profit lever. It has an immediate impact. If you do it well, it trickles down directly to the bottom line,” Daus said. “You don't have to wait long. You don't have massive investments in infrastructure and rebranding.”
Targeted digital offers and developing a robust loyalty program would also help the burger chain attract price-sensitive consumers and boost repeat business.
“It's not about creating more value meals. We have a ton of those,” Daus said. “It's about having targeted, specific offers for specific segments.”
Once Jack in the Box gets its house in order, it can start growing again. However, Jack in the Box should try to expand by developing new stores, including more company-owned units, rather than through debt–laden acquisitions, Daus said. The company is undertaking moves to that effect in the Chicago region, a market where it once had a presence but vacated decades ago.
“There is a lot of white space in the U.S. in terms of geography,” Daus said. “The sky is the limit.”
The company should also consider owning more of its stores and franchising fewer locations.
“It's actually pretty good to have a tighter hand on things and be able to test and pilot new initiatives,” Daus said.
For now, however, the burger QSR is likely focused on avoiding bankruptcy.
“If Jack in the Box can stabilize sales at today's levels, they'll be able to muddle through.,” Setyan said. “But if you get another leg down or two in terms of sales, it's going to be really tough.
Del Taco declined to comment on this story, and Jack in the Box did not respond to requests for comment.
