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Too Many Fish Tacos on the Plate?

The rapid growth of Mexican 'fast-casual' restaurant chains may be cutting into their same-store sales.

August 02, 2003|Karen Robinson-Jacobs | Times Staff Writer

The Southland is swimming in salsa.

Since 2000, restaurant chains, including several of the nation's biggest burger purveyors, have aggressively boosted the number of "fast-casual" Mexican eateries, particularly in Southern California.

The chains' aim was to offer more upscale diners easy access to $4 burritos and $5 tostadas, in some cases as a hedge against ebbing burger sales, in outlets with hipper decor and higher prices than the basic Taco Bell. The ploy worked, and then some.

The rapid expansion -- scores of fast-casual Mexican restaurants have opened in places such as Woodland Hills and Costa Mesa -- has created in the Los Angeles area what might be the nation's most competitive dining market. Now some companies are showing signs of financial strain, as industry analysts and executives wonder whether Southern California may have too much of a good thing.

"The good news is, there's been a lot of growth. The bad news is, there's been a lot of growth," said Sheri Miksa, president and chief operating officer of Carlsbad-based Rubio's Restaurants Inc., which went public in 1999 and grew from 100 stores in 2000 to 144 today. A third of them are in the Southland.

Rubio's said recently that it expected a second-quarter loss of 35 cents to 37 cents a share, contrasted with a profit of 12 cents a year earlier. It blamed the downturn on the costs of a systemwide upgrade and softer sales. The company, known for its fish tacos, expects to be profitable in the second half but not enough to forestall a full-year loss.

The category's biggest player, Baja Fresh Mexican Grill, also is exhibiting growing pains. In June 2002, Wendy's International Inc. bought the Thousand Oaks-based chain for $275 million and has since boosted Baja Fresh's store count to 250 from 170.

Last week, Wendy's Chief Executive Jack Schuessler said that sales at Baja Fresh outlets open at least a year fell by nearly 7% in the second quarter. He specifically cited "cannibalization of sales in the Los Angeles market, where we are growing rapidly."

Franchisees echoed his remarks. "We cannibalized some of the sales from our original store" in Costa Mesa, said Tom Hodges, president of the Quality Restaurant Group, which owns eight Baja Fresh outlets in Orange County.

Overall, he said, business is up -- "but you do draw down sales from one store when you open another one four or five miles away."

Industry consultants consistently list Baja Fresh, with 2002 sales of $249 million, as the leader in the $725-million Mexican fast-casual category. (Fast casual refers to stores that, in service time and price, are between traditional fast-food and sit-down restaurants.)

Technomic Inc., a restaurant consulting group in Chicago, estimates that sales of Mexican fast-casual and fast food, including No. 1 Taco Bell, grew about 4% last year to $7.6 billion -- double the growth rate of the more mature burger segment.

Looking at those growth rates, most of the nation's largest burger chains have tried to bolster their bottom lines with burritos. After McDonald's Corp. took majority ownership in Chipotle Mexican Grill three years ago, the Denver-based chain had explosive growth, to about 260 restaurants from 40. That included 45 new stores in California.

In 2002, Santa Barbara-based CKE Restaurants Inc., parent of Carl's Jr., acquired La Salsa Fresh Mexican Grill, which has 44 restaurants in the L.A. area.

And in January, Jack in the Box Inc. joined the fray by buying Qdoba Mexican Grill for $45 million. By October, the San Diego-based parent firm plans to add 38 Qdoba units to its current tally of 85. Although none can be found in California, analysts wouldn't be surprised if it pushed into the Golden State.

Many chains are finding that the Southland in particular has the kind of upscale demographics that lends itself to frequent fast-casual usage -- and a clientele that's familiar with the food.

"It's a competitive market, and that's not always a bad thing," said Chris Arnold, a Chipotle spokesman. "You have a pretty large customer base that understands the concept."

Arnold said Chipotle was doing well. In its latest quarter, the restaurant's same-store sales increased "comfortably in the double digits, well above 10% everywhere in California," he said.

Big chains, though, are going up against more than each other. Southern California is home to hundreds of independent Mexican eateries and smaller chains such as Burbank-based Poquito Mas, with eight stores.

Unlike independents that thrive by cultivating a loyal, mostly local following, the fast-casual chains are hoping to gain market share by capturing "along the way" sales from impulse diners -- folks such as West Los Angeles resident and actress Tammy Hart.

On a recent Sunday afternoon, she stopped by a Chipotle in Woodland Hills, resting briefly on the maple-veneered chairs, behind the specially commissioned artwork of an ancient Mayan figure. It was a quick break before she continued on to an acting gig.

"I wouldn't drive out of my way for it," said Hart, 22, after enjoying a vegetarian burrito. "It's got to be on my way."

Greg Dollarhyde, chief executive at Baja Fresh, concedes that the aggressive growth has pulled down sales at some stores. Still, he's not cutting back.

"We believe it's in the long-term interest of Baja Fresh to maintain the same growth strategy we've been on," he said. "In the short run, there may be too many. In the long run, the shakeout happens, the shakeout between the winners and the also-rans."

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