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El Pollo Loco feels the heat

El Pollo Loco, with flame-grilled chicken at the top of its menu, urges its customers to “taste the fire.” Now the chain itself is feeling the heat.

Despite its efforts to spice up its menu offerings and boost business, the Orange County company is struggling with red ink and greater competition.

The chain said last week that it had lost $4.7 million in the first quarter of 2011 partly because of a drop in sales of 2.5%. That was on top of significant losses in each of the last three years: $40 million in 2010, $52 million in 2009 and $40 million in 2008.

The 400-store chain, whose majority owner is New York private equity firm Trimaran Capital Partners, has hired a new advertising agency to bolster its image and an architectural firm to improve the look of its restaurants.

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It has dropped slow-selling items like steak tacos and tried to create buzz with a limited-time offering of fish tacos. New side dishes meant to appeal to more upscale consumers include sweet-potato fries, sweet corn cakes and grilled cut corn.

“This is about facing the brutal facts,” said Mark Hardison, vice president of marketing for the chain. The company is banking on its ability to attract new customers like the ones that fill many locations with lines out the door at lunchtime, seeking chicken just off the grill.

“They’re kind of on the bubble,” said Bonnie Riggs, restaurant analyst for NPD Group. “They’re just wondering if there’s a way if they reinvent themselves that they will survive.”

If you want to see intense competition among the region’s many Mexican-style chicken restaurants, check out the intersection of Ball Road and Beach Boulevard in Anaheim.

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El Pollo Loco sits on the southwest corner, near a bus stop. Across Beach Boulevard is Juan Pollo, a small local chain with a cleaner store, bigger portions and lower prices. And across Ball Road is El Pollo Norteño, whose fans say they drive for hours to get charbroiled chicken, tacos and other dishes.

Teresa Sestito, 34, a physical education teacher at nearby Cypress College, knows the corner offerings. Once a fan of El Pollo Loco, she now says, “I used to eat there a lot more, but their prices have gone up and their quality has gone down.”

Among other things, she said, restrooms need to be cleaner. “So I honestly am not there a whole lot anymore,” she said, “And I rarely, if ever, go inside.”

El Pollo Loco is not the only low-cost chain that is trying to come back after suffering during the recession and slow recovery. Several older brands, including Jack in the Box, Sizzler and Applebee’s are hoping that remodeled stores and upgraded menus will bring in more customers.

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But it may not be easy.

Over the last 10 years, chains like Chipotle, Panera Bread and Rubio’s have stormed onto the scene, offering inexpensive meals that are a cut above fast food, in restaurants that are more appealing to consumers. Sales at these so-called fast casual restaurants took off, while business suffered at Carl’s Jr., Jack in the Box, Burger King and others.

Of traditional fast-food places, McDonald’s prospered, in large part, analysts said, because before the recession hit and made business even harder, the venerable chain had remodeled its stores, modernized its food offerings and pressured franchisees to keep locations bright and clean.

“You can’t have good food and a yucky restaurant,” said Steve West, restaurant industry analyst for investment firm Stifel, Nicolaus & Co. in St. Louis. Even if the food in a restaurant is good, consumers will rate it as lower quality if the environment is poor, he said.

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“It’s very clear what McDonald’s did,” West said. “Everybody is trying to take that playbook and copy it. The problem is, not everyone can pull it off like McDonald’s. They may not have the depth of pocket, the resources, the skill.”

Still, El Pollo Loco has a very good chance of turning its losses around, especially as it upgrades, he said.

Many of its stores are already doing well, said spokeswoman Julie Weeks. At the El Pollo Loco on Edinger Avenue in Santa Ana, a line forms out the door at lunchtime most days. A Sherman Oaks location has also been successful in attracting the upscale customers the company wants.

To figure out what was wrong with the brand, El Pollo Loco Inc. Chief Executive Steve Sather last year commissioned an in-depth study, examining the company’s image and the demographics of consumers. The study, which included interviews with current and potential customers, found that although many perceive the company’s food as tasty, the brand itself is not considered exciting by customers who eat out a lot, said marketing chief Hardison.

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The most frequent customers are predominantly Latino, and many buy the chain’s steeply discounted family meals.

But those with higher incomes and education, and non-Latinos, visit El Pollo Loco much less frequently. This is significant, because these are customers who tend to spend more, buying individual meals instead of family packs.

The good news for El Pollo Loco is that it has enormous name recognition — particularly in Southern California — and its fans are devoted. The food is perceived as tasty, healthful and moderately priced, Sather said.

Some consumers stay away because they perceive the old stores — with their drive-through lanes and welded metal seats — as more like old-fashioned fast-food joints than trendy new dining establishments, Sather said.

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“People look at El Pollo Loco and they see the drive-through and they say, ‘You’re fast food,’” he said. “But everything is made to order. The quality of our product is fast-casual, but we’re in this fast-food format.”

To change that, Sather has started a mystery shopper program, sending corporate employees into restaurants on stealth missions to check on the service and cleanliness. He hired San Francisco firm Gensler to redesign its restaurants. The remodeled locations will have comfortable, movable seats and open kitchens.

The company has also brought on the Hollywood advertising agency Goodness MFG, which counts Burger King among its clients. Among the agency’s ideas: commercials that feature a romantic singer with a mariachi backup band serenading a customer’s stomach.

If the ads and upgrades are successful, El Pollo Loco could emerge well positioned to make it as a national brand, West said. Although its stores are heavily concentrated in California, it operates restaurants in states including Arizona, Nevada, Texas, Illinois and Georgia, and Sather hopes to continue to expand.

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“They definitely have the ability to be a premium concept,” West said. “I always thought it would be a successful national chain.”

sharon.bernstein@latimes.com


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