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Wendy's Takes a Big Loss on Sale of Baja Fresh

October 13, 2006|David Colker | Times Staff Writer

Talk about an investment that went south.

Wendy's International Inc. agreed Thursday to sell the Baja Fresh Mexican Grill chain to a group led by Anaheim investor David Kim, who owns the Sweet Factory candy stores and numerous Cinnabon franchises.

The price Wendy's paid for the chain in 2002: $275 million.

The price it's getting for Baja Fresh now: $31 million.

"Obviously it didn't work out the way we had hoped," Wendy's spokesman Denny Lynch said. Dublin, Ohio-based Wendy's, which also announced a restructuring and stock buyback Thursday, said it would focus on selling hamburgers.

Wendy's bought Thousand Oaks-based Baja Fresh when restaurants in its category, quick casual, were hot. These eateries are considered more upscale than fast-food places such as McDonald's and Taco Bell.

"It was like the dot-com explosion for quick casual," said Ron Paul, president of Technomic Inc., a restaurant research firm in Chicago. "There was a frenzy to get into the category."

Some did well. On the day Denver-based Chipotle Mexican Grill Inc. went public in January, its stock gained $22 to close at $44. (Chipotle, which was spun off by McDonald's Corp., closed at $57.23 on Thursday.)

Chipotle, which stresses healthful ingredients in burritos that are prepared in front of its customers, posed stiff competition.

"Baja Fresh had the misfortune to try and expand from its core territory in Southern California to the Midwest when Chipotle was there," Paul said. "Chipotle beat them up."

Customers preferred Chipotle's style of customer-viewed preparation. "Chipotle is more of an assembly-line operation right in front of the customer, with the customer having a lot of say about what is included in the burrito," said Bob Sandelman, chief executive of Sandelman & Associates, a San Clemente-based market researcher.

At Baja Fresh, customers place their orders and wait while the food is prepared away from the counter.

When Wendy's bought Baja Fresh, sales were growing at restaurants open at least a year, a key measure of health known as same-store sales.

"There was a very good growth plan in place," Wendy's spokesman Lynch said.

Same-store sales began falling, but Wendy's added more restaurants to the 169 it originally purchased. "Some of them were built because contracts were already in place," Lynch said.

Wendy's also tinkered with the menu and the management. "There was a hope and belief it would turn around," Lynch said.

In the end, nothing worked. Investors, including billionaire Nelson Peltz, have been pressuring Wendy's to improve results and sell lagging operations such as Baja Fresh.

Wendy's didn't release details of the agreement to sell the 300-restaurant chain, about half of which are company owned. Wendy's plans to complete the sale in the fourth quarter.

In addition to owning the Sweet Factory chain and Cinnabon cinnamon roll franchises, buyer Kim is a franchisee of Denny's restaurants and KaBloom flowers. Kim operates 400 locations of the various chains and employs more than 3,000 people, Wendy's said.

Kim was traveling and couldn't be reached for comment.

The price Kim paid for the chain -- which comes out to about $100,000 a restaurant -- was reasonable, even in the face of declining sales, restaurant consultant Paul said.

"The risk factor is not very high at that price point," he said, "even if he just gets income from the franchise fees."

Wendy's shares Thursday gained $1.39 to close at $35.11. The company said it would buy back 35.4 million shares for as much as $800 million, part of a plan to return $1 billion to stockholders.

Another Mexican food chain, El Pollo Loco, was also suffering some financial heartburn Thursday. Citing market conditions, the Irvine-based chain backed off its plan, announced in May, to raise $135 million through an initial public offering.

The funds were to have been used to repay debt as the company attempted to expand out of its core Southern California market.

"But right now the market does not like restaurant stocks in general," Paul said.

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