Will East Coast go loco for an expanding El Pollo?
Is it chicken or Mexican?
Loyal Southern California customers of restaurant chain El Pollo Loco might well respond, “Who cares? Pass the salsa.”
But for the Irvine company -- now embarking on an ambitious nationwide expansion from its core market -- how New England diners answer the question may prove crucial to its success.
“Our research shows that the Northeast is more oriented toward sandwiches, burgers and bagels and is less hospitable for burritos and other Hispanic food,” said Darren Tristano, a restaurant industry analyst with Technomic Inc. in Chicago. Chicken, however, “is universally consumed and has little deviation from region to region.”
El Pollo Loco -- “the Crazy Chicken” in Spanish -- derives 85% of its sales from Southern California. Its fusion of flame-grilled, marinated chicken and Mexican fast food has worked well in an environment in which the lines between mainstream and ethnic food are blurred.
As the company attempts to satisfy the East Coast palate, the challenge will be to promote its dual identity as giving customers two reasons to check it out, analysts and company executives say.
This month the chain opened at the Foxwoods Resort Casino in Mashantucket, Conn., its first restaurant east of Chicago. The franchise group that owns the location plans to develop 24 more in six Northeastern states. El Pollo Loco also recently announced franchise agreements to build 61 stores in Arizona, Georgia, Missouri, Virginia and Utah. The deals will give the 353-unit chain a wider reach, placing it in 16 states.
With further franchise deals and its own slow but steady building program, El Pollo Loco could nearly double its size in the next five years.
Stephen Carley, a former Taco Bell marketing executive who is El Pollo Loco’s chief executive, is confident that the chain can compete with established national fast-food brands.
“Chicken is the fastest-growing protein nationally, and Mexican is now the most popular ethnic food in the country,” he said.
Moreover, El Pollo Loco’s fare matches up with customer sentiment for healthier food, he said. The company doesn’t cook its French fries in artery-clogging trans-fat oils; its chicken is grilled, not fried; and the poultry is raised without hormones and antibiotics.
Those are big selling points for local customers.
“This tastes better and is healthier” than the fried chicken plied by competitors such as KFC, said bank employee Brian Bellamy, as he picked up a takeout order of legs and thighs from El Pollo Loco in downtown Los Angeles this month.
Carlos Ortez goes to the chain for its chicken, but on a recent visit to the downtown store to pick up food for an office party, he noted the tamales and nachos also listed on the menu. “It is pretty diversified,” he said.
If given the choice, Ortez said, he would patronize independent quick-service Mexican restaurants because they are typically more authentic. Still, the state government employee said, El Pollo Loco sells “tasty and healthy food at a reasonable price.”
Carley is confident that East Coast customers will agree.
Salsa, he noted, outsells ketchup in the condiment aisles of U.S. supermarkets. Grocery and convenience stores sell more than $1.3 billion of tortillas annually, according to market research firm Mintel International Group Ltd., making the food a small but growing competitor in the U.S. bread market.
“I remember when we took Taco Bell to the East Coast and people asked what a ‘take-oh’ was and pronounced the L in tortilla,” Carley said. “When they ordered a burrito, they got out a knife and fork, cut it open and ate the insides out.”
Two decades later Americans have developed far more sophisticated tastes and are more adventurous in their eating habits, he said.
Supported by the national reach of its parent company, Pizza Hut and KFC owner Yum Brands Inc., Taco Bell has restaurants in every state.
But Chipotle Mexican Grill Inc., another fast-growing Mexican chain, has stayed away from New England, although it has opened stores in New York City, which has a large Latino population, Tristano said.
Juan Francisco Ochoa started El Pollo Loco as a roadside stand in Guasave, Mexico, on the Pacific Coast in 1975, selling chicken using a marinade recipe of his mother’s. He opened his first U.S. store in Los Angeles five years later; the restaurant, on Alvarado Street near Echo Park, is still part of the chain.
El Pollo Loco has had several owners through the years, including Denny’s Corp., which bought out Ochoa and his 19 stores in 1983. New York investment firm Trimaran Capital Partners acquired El Pollo Loco a year ago for $415 million.
With new products such as chicken tortilla soup and a $1 taco al carbon, the company is starting to effectively straddle the $10.4-billion-a-year market for Mexican fast food and the $14.5-billion chicken category, said Tristano, the Technomic analyst.
“The idea of chicken or Mexican gives people two reasons why they might want to go to El Pollo. They can use that as a competitive advantage,” he said.
“El Pollo is seen as a good operator that provides a quality, consistent product,” said Randall Hiatt, a Costa Mesa restaurant consultant.
That’s playing out in the company’s financial results, he said.
The typical established store has annual sales of $1.6 million, split evenly between lunch and dinner. The average check is $8.60, on the high side for a fast-food eatery.
Sales at stores open at least a year, an important measure of a restaurant’s financial health, are up about 5% year to date.
Revenue through the first nine months of this year rose 10% to $195.3 million. Net income, however, fell 51% to $1.8 million. Higher interest payments resulting from the leveraged purchase of the company caused the earnings drop, Carley said.
Even as the chain expands to the East Coast, its easiest growth is probably in California and states such as Texas and Nevada, which have large Latino populations that provide an instant customer base, Hiatt said.
But Carley is out to prove that the company can operate as a true national player.
“There is the potential to build 2,000 units, and that would make us a dramatically different growth story,” he said.
In turn, that would bring El Pollo Loco a higher price when Trimaran eventually sells shares of the company in a public stock offering, Carley said.
El Pollo Loco scrapped an offering this year that would have sliced its $260-million debt in half. Although the broad stock indexes have rallied, restaurant shares have fared less well. Record-high gasoline prices this year siphoned money from restaurant spending, souring some stocks.
The new plan is to launch the offering in 12 to 18 months, when the results of El Pollo Loco’s expansion start to show on the financial statements.
In making its own investments, the company is carefully following its tried-and-true formula. The chain is opening 10 company-owned stores annually. All are in the core Southern California market or other Pollo strongholds such as Fresno and Las Vegas.
“We are going to let our franchisees build in the regions that they know best,” Carley said, “and we are putting our capital to work in the areas where we have the lowest risk.”
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At a glance
Company name: El Pollo Loco
Founded: 1975, in Guasave, Mexico
Chief executive: Stephen Carley
Revenue: $66 million in third quarter of 2006
Ownership: Privately held by Trimaran Capital Partners and company management
Source: El Pollo Loco