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Chain LeaderEditorial Archives2004 — June — Cover Story

Crazy Like a Fox
El Pollo Loco banks on new products, higher prices and novel employee standards for growth beyond the West.

Stephen Carley, CEO, El Pollo Loco
El Pollo Loco CEO Stephen Carley is courting general market customers with upscale new products and fast-casual interiors.

Stephen E. Carley likes the phrase “courage of our convictions” judging by the number of times it comes up in conversation at Zarela’s, a fancy Mexican eatery in midtown Manhattan. He is in New York to deliver a speech at the annual Elliott Leadership Conference in the Waldorf-Astoria Hotel. The restaurant, by the way, isn’t his choice, though he is a big fan of Mexican food. A half-chicken braised in tequila sauce costs $14.95 here. At one of Carley’s El Pollo Loco restaurants, he can dine on a twice-grilled burrito weighing nearly a pound for $4.99.

That may be downright cheap to a Manhattanite, but in the world of fast food it’s big bucks. “My strategy all along has been, let’s have the courage of our convictions to price great products what they’re worth,” says the CEO of the Irvine, Calif.-based company.

Courage indeed. Until the 50-year-old executive arrived three years ago, the chicken chain was known chiefly for citrus-marinated grilled-chicken dinners, popular among Southern California’s many Mexicans and Central Americans; 51 percent of El Pollo Loco’s customers are Hispanic. It introduced relatively few new products under Advantica’s ownership, stretching from 1983 to 1999. A line of inexpensive burritos introduced in ’94 built a lunch business; Pollo Bowls, rolled out three years later, drew more non-Spanish-speakers to the chain. A chicken sandwich is finally in test.

Carley has stoked the chain’s new product engine, debuting eight menu items since June ’02. One of them, the Chicken Quesadilla, required a $1,500 grill that was eventually used to create the successful new $4.99 burrito.

El Pollo Loco
Irvine, Calif.
2004 Company Revenues
$216.7 million*
138 company, 179 franchised
Average Unit Volume
$1.4 million
Average Check
Expansion Plans
4 to 8 company, 12 franchised stores in 2004
*Chain Leader estimate

El Pollo Loco stores on average gross $1.4 million, well above rivals. KFC units in Southern California average $1 million (many are co-located with other brands). Advertising spend doesn’t appear to explain the difference. KFC’s corporate stores and franchisees budget roughly $8 million in the heavily Hispanic area, according to DGWB, KFC’s agency in the region. El Pollo Loco will devote roughly the same amount this year advertising the brand throughout four Western states, says Chief Marketing Officer Karen Eadon.

Flavor and product perception account for the discrepancies, insists a longtime KFC franchisee who operates 15 restaurants in the market. “I was in seven focus groups, and people said they loved El Pollo Loco because they thought it was healthy and tasted good, and about half of them were Hispanic,” recalls owner Eddie Sheldrake. “I’m convinced if KFC is to be successful at nonfried chicken, they should copy that flavor.”

Sabor Autentico
The strategy behind El Pollo Loco advertising is to remind Latinos of the food’s authentic flavors, which come from a family recipe for citrus marinade. The chain’s founder, Francisco “Pancho” Ochoa, was running 85 units in northern Mexico before opening his first stateside outpost in 1980 in Los Angeles. Advantica, impressed with the volumes and the food, acquired the company in ’83. It sold the business for $128 million 16 years later in a desperate bid to trim debt. The new owners, New York-based American Securities Capital Partners, hired Carley in 2001.

With strong volumes and tasty products, Carley now wants to venture outside the West. He inked a deal with a pair of experienced Chicago operators that calls for 10 restaurants in 10 years in the Windy City, though one partner boasts as many as 30 El Pollo Locos could be grilling chicken by then. Their confidence is bolstered by an El Pollo Loco survey that showed three of every 10 Chicago Hispanics, many of whom are Mexican, recognize the brand. The first store will open in the largely Latino neighborhood of Logan Square, says franchisee Paul Michaels. But he says the brand’s boldly flavored food will also appeal to yuppies and suburbanites.

El Pollo Loco's Monterrey Pollo Salad
The $4.99 Monterrey Pollo Salad features grilled chicken breast over a bed of Romaine lettuce with corn poblano, Cotija cheese and pico de gallo salsa, garnished with a serrano pepper, and served with creamy cilantro dressing.

Which explains why Carley, a Chicago native and a graduate of Northwestern University’s Kellogg School of Management, is hanging price tags of $4.99 and more on upscale products like twice-grilled burritos and fancy salads. He plans to reposition El Pollo Loco among customers who appreciate authenticity and healthful food preparation.

Carley now thinks he can grab lunch business from fast-casual players like Baja Fresh Mexican Grill, La Salsa Fresh Mexican Grill and Chipotle. El Pollo Loco already has a family business with multiple-piece dinners, a market fast-casual chains lack. The units have drive-thrus, largely absent among fast-casual restaurants. What’s more, the chain isn’t dependent on what Carley calls “upscale yuppies.”

“We do well urban, suburban, upscale, downscale, male, female,” he says. “We think we live in this interesting sweet spot—a fast-food service system with fast-casual quality and ambience.”

For example, the Press-Enterprise, a Southern California newspaper, recently praised the chain’s low-carb, low-calorie Monterrey Pollo Salad, saying its chicken portion set the salad apart from competitors. Yet the reviewer griped that the $4.99 price tag “seemed like a buck too much for the quantity of food offered.” Carley doesn’t bring up the criticism at Zarela’s, though he does reiterate company strategy of having the “courage of our convictions” to charge customers more for the new items.

Preparing for Takeoff
Customers are paying up. All-important same-store sales rose 4.2 percent systemwide in 2003, with much of the increase the result of double-digit gains in the fourth quarter. The chain hiked prices about 3 percent during the year and rolled out the Caesar Pollo Salad, $4.99; Twice Grilled Chicken Burrito, $4.99; and Creamy Caramel Flan, $1.59.

Although privately held, the company is required to report financials since raising $110 million in a public-bond offering last December. The deal, which trimmed debt and paid off shareholders, recapitalized the balance sheet, freeing management to focus on growth. “[El Pollo Loco] is in no way capital constrained,” declares Managing Director Glenn Kaufman of American Capital Securities Partners.

Financial overview of El Pollo Loco

Not that Carley is eager to open a raft of company restaurants. He may open eight, all in the Golden State, at a cost of nearly $1.5 million apiece. Franchisees are expected to open a dozen.

Meanwhile, Carley is winding up a remodeling program costing $75,000 to $100,000 per store. He launched the rehab in 2001, a tough time for restaurants. “It was very tough,” he recalls. “The remodels we did in ’01 and ’02 were a little bit below the hurdle rate. Because we had the courage of our convictions to remodel, we are now getting the consequent benefit by outperforming the organic growth of the market by three times to one.”

El Pollo Loco
According to CEO Stephen Carley, El Pollo Loco’s drive-thrus give it an edge over many competitors because it’s a convenience largely absent among fast-casual restaurants.

Today, he claims, spruced-up units, designed to resemble quick-casual restaurants, are increasing sales by 4 to 7 points. The stores meanwhile are surpassing their hurdle rates in absolute terms. “We need comparable-store sales to increase 7 percent to pay back the remodel, and we are exceeding that,” Carley brags. Although comparisons were easy, the chain still managed to post a very respectable 12 percent same-store-sales gain in the first quarter, ended March 31. New products, redesigned restaurants, better marketing and more productive employees deserve the credit, he says.

Color Coordination
When Carley showed up in ’01, the chain still showed signs of wear and inefficiency. Advantica hadn’t made much of an effort to develop new markets; it had been burned years earlier when it tried to expand the concept outside the West, discovering its flavors and name were foreign. “The company was not in a position to embark on major growth initiatives,” Kaufman says. “It was not best in class.”

Meanwhile, Carley, former vice president of operations for Taco Bell, read Jim Collins’ best seller, Good to Great, a book he says changed his management style. He was impressed with the author’s insistence that people bought into results and momentum. “And not the other way around,” Carley declares. “Results and momentum create alignment, and that’s what gets people to buy in, off the fence, engaged.”

Contrast that to the time and money many companies spend trying to coax employees to buy into the CEO’s vision. “When you look how much time they spend on retreats and off-sites and positioning stuff and doing cultural surveys...You know what? They are going at it the wrong way,” Carley claims.

Under The Hood:
El Pollo Loco's Unit Economics
Land/lease* $750,000
Building $455,000
Fixtures and equipment $270,000
Total investment** $1,475,000
Annual sales $1,390,000
Pre-rent cash flow $386,000
Return on invested cash 26.2%
Source: company reports; *includes site costs; cap rate is 9 times; **does not include average pre-opening cost of $40,000; 4 percent advertising expense deducted from unit cash flow

To get workers behind him, Carley developed new standards for company and franchised stores that went into effect 18 months ago. The program, dubbed “Scorecard,” measures 10 unit-level metrics and assigns a color (green, yellow or red) to each restaurant denoting its performance. Stores place tiny colored flags on registers; headquarters hangs the results throughout the building.

If a restaurant slips into the red zone, managers have 90 days to get to green. The company has discovered, however, that inept managers weed themselves out. “Now what’s happening is that somewhere between day 60 and day 90 they quit because they know,” Carley says. “It’s impossible not to take action.”

Good to Great
Standards are the topic of Carley’s talk at the Elliot Conference. Although El Pollo Loco wasn’t in a turnaround situation when he arrived, “things weren’t moving as fast as they could,” he tells a roomful of restaurant brass. He describes his challenge as getting “employee engagement” to go “from good to great.”

Carley puts up some slides showing the performance criteria that restaurants use to measure results: food cost, guest complaints, food safety, workers’ compensation, labor, etc. Trouble is, he announces, many chains measure these things but few do much about fixing them, particularly if units are profitable. But the worst sin is not sharing this information with employees, who end up in the dark about how their efforts affect business, he says.

A company score sheet shows that by December, 127 company restaurants were in the green zone, nine in yellow and none in red. Franchise stores lagged behind. Of the 55 units with the program, 24 were green. Carley’s goal is for 90 percent of all stores to reach green by year-end.

Brags Carley, “The system is working beautifully.”

Eat More Chicken
Pollo Bowl: attracted non-Spanish-speaking females
Chili Lime Chicken: brought back in 2003
Chicken Tamales:
holiday-only LTO

Barbecue Chicken: non-Latin product that won’t return
Chicken Quesadilla: new grills cook in 27 seconds
Chicken Fiesta and Chicken Caesar Salad
Twice Grilled Chicken Burrito: aimed at fast-casual user Creamy Caramel Flan: authentic Mexican dessert
Monterrey Pollo Salad: reviewer gripes not large enough
Grilled Fiesta Burrito

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