| IRVINE, Calif
IRVINE, Calif America's No. 1 Mexican fast-food chain is ringing in 2012 with what may become its biggest menu refresh in years.
Yum Brands Inc's (YUM.N) Taco Bell will begin testing an expanded, more upmarket menu that focuses on fresh ingredients -- think Chipotle Mexican Grill (CMG.N) on a budget -- on January 26 in Louisville, Kentucky, and Bakersfield, California.
If it is a hit, the chain's so-called Cantina Bell menu could be offered in Taco Bell's U.S. restaurants by the end of the year.
The 50-year-old chain needs to revive sales, which went stale in 2011.
Taco Bell's closely watched sales at established restaurants were flat in the first quarter, fell 5 percent in the second and were down 2 percent in the third.
It should get some help from the national debut later this year of Doritos Locos Tacos -- yes, the shells are made from PepsiCo's (PEP.N) popular nacho cheese snack chips -- and the introduction of breakfast in 800 restaurants in the U.S. West later this month.
But the real opportunity for Taco Bell and many other restaurants is in serving "fresh" food to a growing number of diners who are willing to pay a bit more for it.
The roughly 5,600-unit chain's Cantina Bell test menu was created by Miami chef Lorena Garcia, who appeared alongside Chipotle founder and co-Chief Executive Steve Ells on the reality television show "America's Next Great Restaurant."
It includes $5 tacos, burritos and bowls. Those items also are staples at Chipotle, where they cost around $8.
Other Cantina menu offerings will be familiar to Chipotle devotees: black beans, cilantro rice and grilled corn salsa.
Reuters tasted the food and found that the Cantina menu's flavors don't whack you over the head like Taco Bell's usual bean, cheese and meat-loaded fare. Marinades, guacamole and salad dressings have herbal and citrus notes that let the underlying ingredients shine through without being bland.
Taco Bell has been somewhat cryptic about the test menu and few outsiders have tasted the food, prompting hand-wringing over whether Taco Bell plans to compete head-to-head with companies like Chipotle and Qdoba Mexican Grill (JACK.O).
"That's crazy talk. I'm not trying to reposition Taco Bell to be Chipotle," the chain's Chief executive, Greg Creed, told Reuters in a recent interview and menu tasting.
"To be a more relevant Taco Bell, we can sell products that are every bit as good but cost a whole lot less," Creed said.
"This is one of those watershed moments where we're going to redefine what the brand stands for."
Restaurants that sell food made with fresh, higher-quality ingredients are a bright spot in the otherwise stagnant restaurant industry, whose overall sales are expected to lag population growth this decade.
Chipotle, which uses hormone-free meats and organic produce when possible, is a good example. It reported industry-leading same-restaurant sales growth of 11.3 percent in the latest quarter, compared with Taco Bell's 2 percent decline in the third quarter.
Taco Bell said its Cantina menu was designed with fast-food diners in mind and that testing suggests it can broaden Taco Bell's customer base without turning off the hungry young men who frequent the brand.
While Cantina menu prices are higher than the $1 to $3 items commonly found on Taco Bell's menu, $5 is not a new price point for the chain. Taco Bell combo meals and premium products -- like the XXL Grilled Stuft Burrito and the Fiesta Taco Salad -- can cost $5 or more.
Wall Street analysts are reserving judgment, since Taco Bell has had a history of misses with diet and healthy fare.
"You can be a little ahead of your customers but not so far away that you can't even nudge them in that direction," said Sanford C. Bernstein analyst Sara Senatore.
Regardless of the outcome of the test, Chef Garcia will leave her mark on the chain. This summer, Taco Bell will start using her guacamole and fiesta salsa in its food.
Wall Street analysts said meaningfully different food product launches have been too few and far between at Taco Bell in recent years. At the same time, the dismal U.S. economy prompted other restaurants to invade the low-price arena that is Taco Bell's sweet spot.
Those factors last year left the chain vulnerable to a bogus, but ultimately sales-denting lawsuit over the contents of its seasoned ground beef.
The lawsuit was quickly dismissed, but Taco Bell is still recovering. Executives at Yum, the chain's owner, have vowed to dramatically improve both sales and profit performance in 2012.
Creed declined to say when he expects all-important sales at established restaurants to turn positive.
Meanwhile, fast-food leader McDonald's Corp (MCD.N) has been running commercials about the farmers that grow its food, an effort to emphasize its food quality and freshness.
Taco Bell gets low food quality scores in customer surveys and analysts said it would be wise to do something similar.
Dennis Lombardi, executive vice president of food service strategies at WD Partners, said the low quality scores aren't surprising or worrying for Taco Bell, which pioneered fast-food value menus and still sells some food for less than $1.
"There's a trade-off in the consumer's mind," Lombardi said.
"I'm somewhat skeptical about (Taco Bell's Cantina menu), but I don't think they have a lot to lose," RBC Capital Markets analyst Larry Miller said.
If stay-at-home mom Heather Cervantes is a bellwether, Taco Bell may be on to something.
Cervantes, 34, said she and her young sons Jonah and Jakob became fans of the chain's Doritos tacos when they were tested in their hometown of Fresno, California.
But Cervantes also is on the lookout for healthier alternatives and is open to trying the Cantina menu.
"Watching 'Food Inc' has totally changed the way I want to eat," said Cervantes, referring to a scathing 2008 documentary about industrial food production in the United States.
(Reporting By Lisa Baertlein in Los Angeles)