Tempest in a Taco

Three look-alike restaurant chains slug it out to see who will be número uno in Mexican fast food.

October 1988By Comments

“You’re giving away the store!” yells Mike Stehling as he supervises my work assembling tacos at the double drive-through window at TaCasita #1 in San Antonio. “You’re putting too much cheese on those tacos.” Mike watches nervously as I get in the way of the four quick-fingered girls who process more than five hundred take-out orders a day in an average of ninety seconds an order. “You weren’t supposed to put guacamole on those chicken fajitas,” Mike says with a sigh. “Let’s go sit down before you drive away all of my customers.”

Mike had invited me to spend a few minutes bungling orders at his Mexican-food emporium to show me the ingredients that go into the success of patio dining. One of the hottest concepts in the $60-billion-a-year fast-food industry. The term “patio dining” may not be in your active vocabulary, but you have almost certainly eaten at or at least caught a glimpse of a patio restaurant. Their candy-pink or turquoise paint jobs glowing, these relentlessly cheery dining establishments stand out amid battalions of competitors. They have brought genuine Tex-Mex cooking to fast-food land, combining cafeteria convenience, margaritas, and a fantasy south-of-the-border atmosphere in a package that customers find irresistible.

If anyone should know about patio dining, it is Mike Stehling, because he and his brother Felix pioneered the idea. Their success, though, has been a mixed blessing. It has brought the Stehlings financial gain, but it has also attracted both the welcome and unwelcome attention of Texas’ savviest restaurateurs. In addition, it has generated two lawsuits having to do with copying and restraint of trade. Mike Stehling isn’t involved in the legal combat, but he does know how it all started.

Mike and Felix came into the Mexican-food business by way of investment, not ancestry. The brothers grew up in Fredericksburg, two of eleven children born to German Catholic parents who operated a men’s clothing store. A handful of Stehling children moved to San Antonio to attend St. Mary’s University and settled down to live in the Alamo City. In 1978 Mike and Felix decided to start a restaurant on the site on an old Dairy Queen at Hildebrand and San Pedro, north of downtown. After interviewing a number of cooks and sampling their wares, the two brothers chose Margie Lopez Abonce, a pleasant, heavy-set woman who at the time had fifteen years’ experience in the San Antonio restaurant business. “I just prepared food for Mike and Felix like I made for my family,” Margie explained. “Enchiladas, carne guisada—and they liked it.”

Others in San Antonio liked Margie’s recipes as well. The restaurant, which Mike and Felix named Taco Cabana, became successful beyond the Stehlings’ most optimistic projections, as students from Trinity University, truck drivers, families, off-duty policemen, and late-night partiers filled the wooden picnic tables in the unornamented semi-enclosed patio 24 hours a day. Some came for the enchiladas, the spicy borracho beans, and the weekend menudo, while others ordered food as an excuse to indulge in massive amounts of freshly made pico de gallo, the restaurant’s hallmark. With all dinner plates priced under $4 and bean-and-cheese tacos for 69 cents, Mexican-food fanatics could afford to come back to the restaurant again and again—and bring the family.

About three years after opening the restaurant, the brothers opened a second, at the corner of Bandera and Wurzback. This one built on the formidable success of the original by incorporating the relaxed, beer-drinking comfort of a San Antonio icehouse. In contrast to the forgettable wood paneling of the original restaurant, pink paint and neon trim decorated the building. A glass-and-wood entrance flowed comfortably to the country, which offered customers a display of iced-down bottled drinks while they consulted the hand-painted menu board listing the numbered food items—with lowest priced items first. The brightly tiled kitchen area was open to show workers fixing homemade tortillas and cooking fajitas on the huge grill as others busily prepared take-out orders for the double drive-through windows.

After customers placed their orders and picked up their drinks, which in the new restaurant included beer and margaritas, they made their way to a freestanding condiment bar piled high with chopped cilantro, onions, peppers, and salsa. Piñatas, puppets, and pastoral murals of campesinos set a festive mood inside, and glass doors painted with palm trees and taco-munching monkeys led to the outdoor seating areas. The doors replaced the canvas sheeting of the first Taco Cabana and had the advantage of being weathertight. The exterior patio area was expanded and semi-shielded from the busy intersection by strategically placed shrubbery. “We were the first ones to build a dining area like this,” says Mike, drinking coffee under the cedar-pole roof of the enclosed patio. “People really seemed to like the fiesta-ish colors.”

The Stehling brothers replicated the formula of the second restaurant in seven other locations in San Antonio, Houston, and Austin over the next three years. Taco Cabana’s success continued as sales at each outlet averaged well in excess of $1 million per year, a figure comparable with sales at a typical McDonald’s, the top-grossing fast-food chain in America.

It wasn’t long before others in the notoriously competitive restaurant business noticed Taco Cabana. In 1984 Houston restaurant developer Marno McDermott, the founder of Chi-Chi’s and then the chairman of the board of Fuddruckers, approached the Stehlings with and offer to take Taco Cabana nationwide. McDermott had a reputation in the restaurant business as a manager with a sharp eye for a good concept and the financial muscle to act quickly on his business hunches. But the Stehling brothers did not feel ready at that point to go national, and they refused McDermott’s proposition.

The idea of creating a national chain wasn’t completely devoid of appeal, though, especially to Felix Stehling. As soft-spoken Mike explains, “It seemed like Felix wanted to open up a thousand restaurants or something. It was just a little too much for me.” The brothers decided to go their own ways in the fall of 1986. Felix kept five restaurants and the name “Taco Cabana,” and Mike retained four outlets, which he renamed TaCasita.

Unfortunately for Felix, McDermott wasn’t about to give up on starting a national chain of patio-dining restaurants. Indeed, while the Stehlings were building Taco Cabana, McDermott was working feverishly to develop his own operation. Early in 1985 McDermott quit Fuddruckers, which later went into a financial tailspin, and in April 1985 he incorporated a new company, Two Pesos.

McDermott and his longtime associate Thom Dietrich quickly opened the first Two Pesos on Gessner in northwest Houston. The place was an immediate success. Customers who had eaten at Taco Cabana noticed a striking similarity between the two, from the open kitchen and the seating to the menu and the prices. Even the first manager, Henry G. Cisneros (no relation to Henry C., the mayor of San Antonio), came from the Taco Cabana organization. The most apparent difference between the first Two Pesos and Taco Cabana was the color scheme: Two Pesos substituted turquoise for Taco Cabana’s pink.

Two Pesos expanded rapidly, building nineteen new restaurants in eighteen months, and not just in Texas. Two Pesos restaurants are now in Dallas, El Paso, Denver, Oklahoma City, Phoenix, and Norfolk, Virginia. “We do a volume in our restaurants that would be a dream for most other restaurants,” said McDermott in a Dallas newspaper story in the spring of 1987; each restaurant averages 2,000 to 2,500 customers a day. A Two Pesos opened in Atlanta a month before the Democratic convention, offering free drive-through lunches to the city’s taxi drivers for one day. And the company is just completing a restaurant in Minneapolis in order to “test the northern waters,” according to director of franchising Bob Butterfield.

Investors believed enough in Two Pesos to buy more than $5 million worth of its shares. Signs on the counter of Two Pesos restaurants advertise that the company is publicly held, encouraging patrons to “own a piece of the Peso.” Two Pesos stock reached a high of $14 a share in September of 1987 and is now trading at around $3. The fluctuation in price reflects the public’s endorsement of the patio trend tempered by caution: The concept has yet to prove itself outside the Southwest, and increased labor and food costs and rapid expansion have chewed up Two Pesos’ revenue.

Felix Stehling of Taco Cabana watched McDermott’s success with growing restlessness. He finally decided to take on McDermott mano a mano. In late January 1987 Taco Cabana International filed suit against Two Pesos for allegedly duplicating Taco Cabana’s “Trade dress,” a legal term that encompasses everything from festive, brightly colored interiors to tortilla-making machines, counter design, and menus. Oddly enough, the strongest legal precedent for fighting such alleged copying involved McDermott’s former company, Fuddruckers. In that case it was Fuddruckers that had been wronged and that had successfully sued two competitors for duplicating Fuddruckers’ trade dress.

Once the legal battle was joined, Two Pesos countersued Taco Cabana, alleging that the restaurant had hindered Two Pesos’ ability to grow and asking for damages. Fuddruckers has also sued McDermott for alleged breach of corporate opportunity, meaning that McDermott developed his patio-dining concept while working for Fuddruckers.

In addition to stirring up a legal hornet’s nest, Taco Cabana itself has started on an aggressive expansion campaign. In September 1987 the company announced a joint-venture agreement with Dallas-based Chili’s. Norman Brinker—the restaurant-industry leader who once headed Steak and Ale and now head’s Chili’s, which he founded in 1975—described Taco Cabana as a “vibrant company with a solid track record” and expressed confidence in the future of the Taco Cabana patio-dining concept. “The price value is so good,” he said, “and Mexican food is eaten across America.”

Although it has not matched the blistering pace of Two Pesos’ expansion, Taco Cabana has opened restaurants in Houston, Dallas, El Paso, and smaller Texas cities. Two locations will soon be open in Southern California, where the climate, highway culture, and large Hispanic population combine to create the most promising market yet for patio dining. The success of Taco Cabana has even attracted the attention of people outside the restaurant industry, including officials of the Immigration and Naturalization Service, who announced last February that the agency intended to fine Taco Cabana $4,500 for alleged violations of the new immigration law. When asked why Taco Cabana hired so many illegal Mexican workers, a company spokesman replied, “They’re the only ones who can tell if the beans are burned.”

Even though no one knows whether patio dining will catch on outside the Southwest, there are a number of good reasons why an ever-increasing number of “eater occasions”—to use an industry term—will take place at Two Pesos, Taco Cabana, or TaCasita. First is the price. A family of four can eat breakfast, lunch, or dinner (and the adults can have a beer or a margarita with their food) at a patio restaurant for around $14, a price that compares favorably with that at any of the other franchise eateries that line America’s roadways—and most of those don’t serve alcohol. The second reason is the atmosphere. Patio dining is perhaps the most kid-friendly eating environment in the country today. Babies love the bright colors and the busy , open layout; toddlers and older children can scream and run around the patio without disrupting other diners (well, not very much); teenagers can find their own table away from their boring relatives; and parents can relax, have a drink, and pretend they are in a bar, away from the kids. And even if the restaurant is not crowded, the abundance of knickknacks on the walls, the piñatas, the chile-shaped Christmas lights, and the recorded Mexican music still make the restaurant seem busy and inviting.

The third reasons for the success of patio dining lies in the service: Accommodating but—and this is key—impersonal. Most Americans are, I am convinced, uncomfortable being waited on. It goes against our democratic grain. Patio restaurants strike a happy medium between franchise and formal service. You don’t have to queue up at a stainless-steel counter, and you don’t have to deal with an eager-beaver waiter whose name you didn’t want to know in the first place. And for the 30 percent of the patio diners who choose to take out their Mexican food, the drive-through windows are an added attraction, offering speed and entertainment: Operating the second of the two windows involves pushing buttons and watching trays on conveyor belts whisk away money and return hot food. It’s almost like being served by a friendly robot.

The lawsuits between Taco Cabana and Two Pesos, the first scheduled for trial this fall in a Houston federal court, may determine who will win the fight for America’s patio-dining dollars. Each side does seem to have a grievance against the other. The Two Pesos restaurants do closely resemble Taco Cabana, and Two Pesos may have a point that Taco Cabana’s lawsuit has hindered Two Pesos’ ability to grow: Taco Cabana has refrained from suing other patio restaurants, such as Alfonso’s in San Antonio (which also serves Mexican food) and the Houston-based Chinese eatery Two Yen.

Aside from the lawsuits, the style of the principals involved in the patio-food fight may decide who wins the national crown. Marno McDermott has had at least two blockbusters in the restaurant business, Chi-Chi’s and Fuddruckers. McDermott rapidly expanded both chains, experiencing great success at first, followed by serious financial trouble. “Timing is everything with Marno,” says Malcolm M. Knapp, the head of a New York-based marketing-research firm specializing in food service. “He has a real gift for concepts that are going to work. But how long will he stay with them? That is an open question.”

Taco Cabana is more conservative, financing its growth with franchise and joint-venture agreements rather than with debt and public stock offerings. Felix Stehling’s join-venture partner, Norman Brinker, probably best personifies the company’s management style. Malcolm Knapp describes Brinker as a “builder,” someone who can take a company, enhance its value, and keep it running profitably. “And in the long term,” Knapp says, “I have to go with a builder.”

I ate and drank my way along the highways of San Antonio, Austin, and Houston in an attempt to choose the best patio-dining chain from a customer’s point of view. I concluded that as far as food quality, price, and service were concerned, it was a toss-up. All three organizations offered consistently good food, relatively strong margaritas, and fast service. Differences among them were small. Two Pesos supplies a hot sauce in addition to mild sauce and pico de gallo at its salsa bar and caters more to a margarita-drinking crowd. Taco Cabana and TaCasita have more-colorful decorations, in addition to green-tiled bathrooms that make post-margarita stops a pleasure.

I would have to say that for my dollar, the best patio restaurant is the one that is closest when I get the urge for Mexican food. And I am not alone in that verdict. In El Paso, Taco Cabana is doing better business than Two Pesos, because it is closer to UTEP; in Houston, Two Pesos has better locations and thus gets more business.

In Austin, TaCasita is the closest to my home and therefore my favorite. By staying out of court, Mike Stehling has the advantage of being able to devote his full attention to the business. He operates his five restaurants with the quirky hands-on management style that was largely responsible for the original success of patio dining. And he has something that money can’t buy—family loyalty. “Brother Bill manages the store on Research in Austin,” he explains, “Brother George operates the store on Ben White, and Sister Virginia Crowe operates our Houston location. Brother Pat is, um, well, looking for locations in Puerto Vallarta.”

Mike’s sister Corinne Danysh accompanies Margie Lopez Abonce, the woman who created the Taco Cabana recipes, as she does quality checks at each TaCasita every two weeks. “The only way to tell if the food is good is to eat it.” Margie explains. “It is not good for my figure, but it is part of my job.”

The folks who run TaCasita won’t make a killing in the stock market, but they won’t go broke either. They will continue to serve high-quality, low-priced Mexican food—at least as long as Mike and Margie have anything to do with it.

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