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Taco Bell serves up breakfast with 'Biscuit Taco'

A year ago, Taco Bell made a run outside its border and gambled on breakfast. Now it's doubling down. Get ready for the Biscuit Taco.

"We've tried to make chicken and biscuits portable," said Taco Bell CEO Brian Niccol inside the company's test kitchen in Irvine, California. Why make them portable? "Why not?" he replied with a laugh.

CNBC was the only broadcast network allowed inside to get a first look at the new taco, which is made with a buttermilk biscuit. The taco can be filled with eggs and sausage or white-meat chicken breaded with a mixture that includes tortilla chips and spices. For sauce, customers can choose between country gravy or jalapeño honey.

Goldman Sachs estimates that Taco Bell holds 5 percent of total fast-food breakfast revenue in its first year in that market, and the unit of Yum! Brands and has taken 1 percent of share from its rivals. Fast food chains, the firm said in a research note, "are now spending record dollars on breakfast ads."

Breakfast v. late night

Taco Bell’s Biscuit Taco
Candice Tahi | CNBC
Taco Bell’s Biscuit Taco

Niccol said customers in the south asked for a biscuit item, and after testing, the company decided on one that it's rolling out nationwide. "Our goal here is to make breakfast as famous as late-night," he said.

However, there are no plans to combine breakfast with late-night yet, though one may assume that the chain's core customer—think 22-year-old male—might like breakfast at midnight.

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One reason that won't happen soon is because combining the two menus could crowd the kitchen and slow down food preparation. Niccol added that customers aren't asking for both right now.

"What we've seen so far in some early tests is people aren't ready to do breakfast late-night," he said. "They're still way into the Cheesy Gordita Crunch, or our traditional crunchy taco." He noted, however, that those preferences could always change.

Fritos Taco

Outside of breakfast, other food innovations are coming. The Doritos Locos Taco partnership with PepsiCo's Frito-Lay group has been such a hit that later this summer, the company will begin testing a new Fritos Taco. The taco shell will be made of Fritos chip and filled with chili, cheese, lettuce, tomatoes and sour cream. Taco Bell's goal is to introduce the taco in 2016.

The company is also testing catering in Houston. Internationally, Niccol said expansion in India is leading to trends like putting local vegetarian dishes into tacos and burritos ("It tastes fabulous...I'm not sure everyone in America is ready for that yet at Taco Bell"). And the company continues to experiment with the menu and prices at its food-truck style restaurant in Huntington Beach, California, called U.S. Taco Co.

"We'll try flavors and proteins like carnitas and fried avocados—traditionally things we wouldn't do at Taco Bell," the CEO said. Some of those experiments could make their way to the Taco Bell menu.

Delivery

Then there's the prospect of delivery. Starbucks announced last week that it will be testing delivery later this year, and Niccol thinks it's in Taco Bell's future, too.

"We want Taco Bell to be on-demand," he said. "I think delivery plays (into) that."

There are challenges, however. Taco Bell's sister company at Yum!, Pizza Hut, has been delivering pizzas for decades, but tacos and burritos may not travel as well or as far. They're also lower-priced than pizza, making delivery potentially unprofitable without a set minimum order amount.

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"We have not figured out yet how to do it, because we want to protect the integrity of the food and the experience that you have," Niccol said. "There's still more work to be done, but it's not far off, I think."

Shorter term, the company plans to expand mobile ordering beyond its popular app. Niccol said while the app has had more than 2 million downloads, the company's website has 4 million unique visitors daily, so ordering will be expanded to the main website later this summer letting customers order online from anywhere, even the desktop.

...and something called 'Z-WE's'

Longer term, the company is looking past its core audience of Millennials to what it calls the "Z-WE's," which encompasses "Gen Z," the youngest of young adults, down to preteens.

"I'm competing for their mind space. How do I get them so that when they first get their car keys at 16, the place they want to go with their buddies or girlfriends is ultimately Taco Bell?" Niccol said. "I think the biggest competitive threat we have is losing relevance. We just cannot let that happen."