Del Taco looks beyond the after-party crowd to feed professional night owls

Key Points
  • Del Taco is launching new late-night menu items at the end of the month to cater to the after-hours crowd.
  • For Del Taco, folks that come to its restaurants in the middle of the night aren't looking for Dollar Menu deals or small portions.
  • The fast food Mexican chain makes 25 percent of its sales from overnight purchases, orders placed between 8 p.m. and 6 a.m.
Del Taco's Epic Fajita Burrito
Source: Del Taco

Late-night pit stops for food are no longer just for college kids and young adults looking to sop up a few beers with a burger and fries.

The rise of the "gig economy," more freelancing and less traditional nine-to-five office hours, has altered eating patterns and led to an increase of people looking for meals at odd hours.

Nurses working the graveyard shift, Uber drivers looking for a quick, on-the-go meal before heading to pick someone up at the airport or factory workers getting off the third shift, all need a place to eat. And Del Taco is pitching itself as the place to go.

The fast food Mexican chain makes 25 percent of its sales from orders placed between 8 p.m. and 6 a.m., Barry Westrum, chief marketing officer at Del Taco, told CNBC. And each year that percentage is growing.

To bolster these overnight sales further, Del Taco, which has more than 560 locations predominantly on the West Coast, is adding a few new items to its late-night menu at the end of this month, catering to this crowd.

"We've been in the late-night business for some time now, but what we have noticed is that some of our competitors have actually started to back off late-night hours and late-night promotions," Westrum said. "So we really see this as an opportunity to steal some market share."

Growing same-store sales at restaurants has been a challenge, especially as customers have more options of where to eat out and more companies are offering discounted food. This has many restaurants expanding outside of their traditional breakfast, lunch and dinner offerings.

"Unsurprisingly, a lot of this demand comes from students and so outlets near college campuses often see a good spike in sales," Neil Saunders, managing director at GlobalData, told CNBC via email. "However, there are also other pockets of demand from workers with unsociable hours, people who are travelling and those who may have been out and about and too busy to get dinner."

Westrum said that late night tends to get a reputation for just being for the "after-party crowd," but that Del Taco sees more people coming into their restaurants who are working nontraditional hours and either looking for either a late dinner or an early breakfast.

"Competitors have a tendency to focus on that party crowd and we see this day part as much more than that," he said.

Del Taco CEO on staying fresh amid rising avocado costs

Del Taco has posted 18-straight quarters of system-wide same-store sales growth, including a 3.7 percent gain in its first quarter, which it reported late Thursday. Shares were trading 4 percent higher on Friday, but are down 16 percent over the past year.

Rival Mexican chain Taco Bell has long been trying to entice in customers with neon signs advertising the "fourth meal" and late-night tacos and burritos at a discount. Taco Bell has plans to update its late night offerings with a program called "After Dark," which focuses on speed during late-night peeks, Yum Brands CEO Greg Creed said during an earnings conference call Wednesday.

For Del Taco, folks that come to its restaurants in the middle of the night aren't looking for Dollar Menu deals or small portions, the company said. That's why it's bringing Queso Loaded Nachos, Queso Loaded Fries and a Churro Dipper Shake to its menu on May 24. These are all heartier plates with a slightly higher price tag.

"There is no question that [late-night] consumers are a little less price sensitive and a little more willing to indulge in more of the premium items on our menu," Westrum said.

The new nachos have a suggested retail of $3.99 and the fries will cost around $4.49.

"You can't drive someone to a campaign to eat food at 2 a.m. that they would eat at 10 a.m.," Cameron Peebles, CMO of inMarket, a digital advertising firm, told CNBC.

Peebles said a little more than 5 percent of all Del Taco visits occur between 12 a.m. and 4 a.m., according to data from inMarket inSights.

Del Taco isn't the only chain that sees a large percentage of diners coming after dark. Some 13 percent of Waffle House's visitors come to the chain between 12 a.m. and 4 a.m., the highest percentage of the national chains the researcher studied, according to inMarket.

Waffle House, Denny's, IHOP and other late-night diners cater to a similar set of customers, ones that work at odd hours and are looking for a larger meal. However, these casual dining chains, ones where customers sit down to order, aren't as appealing to folks who are looking for food on-the-go.

Del Taco faces more direct competition with other fast food chains, particularly ones with drive-thrus that are open late into the morning.

Technomic data suggests that under 4 percent of McDonald's and about 7 percent of Taco Bell visits occur during the late-night period.

"The late-night window is one that is currently underserved by many fast food chains," Saunders said. "While it is not as important as dinner or even lunch, there is a very active market that wants fast food late at night and into the small hours of the morning."

Correction: Cameron Peebles is CMO of the firm inMarket.