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E. coli incident takes a bite out of Taco Bell

The chain's sales fell 5% in the fourth quarter, when tainted lettuce sickened customers.

February 13, 2007|Jerry Hirsch | Times Staff Writer

In the days that followed Taco Bell's E. coli outbreak late last year, the Mexican fast food chain could count on people like Myles Jeffrey, a 16-year-old teen actor from Seal Beach.

Taco Bell sales fell 5% in the fourth quarter of 2006, its parent company said Monday. During that period, tainted lettuce served by the chain caused an E. coli outbreak that sickened more than 70 East Coast customers.

Without loyal customers such as Myles, the company's sales would have taken an even worse hit.

During the peak of the outbreak, sales for the Irvine-based chain plummeted 20% nationally and 35% to 50% in the Northeast, said David S. Palmer, a UBS Equity Research analyst.

"Consumers have short memories and are pretty forgiving," said Bob Sandelman, a San Clemente-based restaurant industry consultant.

Taco Bell became the butt of late-night comics. Jay Leno talked about how Taco Bell should change its slogan from "Think Outside the Bun" to "Puke Outside the Store." David Letterman suggested that the chain add "Taco Apocalypto" to its menu.

Taco Bell corporate parent Yum Brands Inc. of Lexington, Ky., barely mentioned the outbreak in its fourth-quarter earnings report released Monday.

Yum obliquely blamed the 5% drop in sales at Taco Bell restaurants open a year or more on "adverse publicity related to a produce-sourcing issue." E. coli was conspicuously absent -- even though it contributed to calls for more stringent farm practices in California and greater federal oversight.

Myles, a senior at Los Alamitos High School, doesn't spend much time thinking about the "produce-sourcing" issues when eating his fill of wraps, gorditas and tacos at least twice a month.

"I eat there because it is cheap for how much food you get," said Myles, who played the voice of Steve in the 2006 animated film "The Ant Bully." He figured the odds of getting sick were on his side. "Statistically, I thought I would be fine."

Yum provided almost no financial details about the effect on Taco Bell except to say that sales were recovering from their December low.

Overall, Yum reported a profit of $232 million, or 83 cents a share, a 3% gain from $226 million, or 77 cents, a year earlier. Sales rose 4% to $3 billion. Yum also owns the fast food chains Pizza Hut and KFC.

Before the earnings release, Yum shares rose 29 cents to $60.78. The price, near its 52-week high, was little changed in after-hours trading.

In a report Monday to investors, UBS analyst Palmer said he believed Taco Bell restaurants would bounce back to at least flat sales and might log "slightly positive" growth in April.

Yum also will collect an undetermined level of insurance payments to help offset profit lost because of the E. coli-related drop in sales, he said.

Taco Bell sells more than $6 billion of tacos, chalupas and burritos annually through its 5,800 U.S. restaurants.

Although Taco Bell may have escaped with a minimum of financial damage, the outbreak was sandwiched between two other problems that drew national attention.

One involved packaged spinach in supermarkets. The other involved E. coli-tainted lettuce served at Taco John's, a smaller Mexican chain.

Last week, California agriculture officials certified a voluntary food safety program for lettuce, spinach and other leafy vegetables after gaining agreement for the plan from processors and shippers that handle a combined 70% of the greens grown in the state.

The agreement is a response by growers and shippers to the outbreaks, including the Taco Bell incident. All were linked to California produce.

Taco Bell itself has changed the way it does business.

The chain fired Irwindale-based Ready Pac Produce, the produce supplier for the 452 Taco Bell restaurants in the Northeast states where the outbreak occurred.

It now uses Taylor Farms of Salinas, Calif.

The company also has doubled the amount of testing it conducts at food suppliers.

Additionally, Taco Bell said in a statement, it had raised "requirements for good agricultural practices involving testing water and soil, the use of compost and fencing of fields." It said it was testing lettuce in the field before harvest so that if a problem was detected, the produce could be removed before it was distributed to retail outlets and consumers. Lettuce is used in 70% of Taco Bell's food offerings.

"Food safety is a growing concern for restaurant chains like Taco Bell," said Dennis Lombardi, an industry consultant with WD Partners in Dublin, Ohio. "If contaminated water is used to irrigate a crop, it is really hard to discover short of testing every food product."

jerry.hirsch@latimes.com

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