Fresh Competition
Qdoba plays up food quality, options and speed of service to set itself apart from rival burrito chains.

By David Farkas

CEO Gary Beisler believes bold flavors and products you can’t get elsewhere are key to Qdoba’s growth.

On a Wednesday in early summer, Gary Beisler flips on the air conditioning in his Porsche Carrera and heads west on Interstate 70. It’s a short hop from Qdoba Mexican Grill headquarters in suburban Denver to the chain’s nearest company outlet, an end cap next to a movie theater. Yet it gives the 48-year-old chief executive time to explain why he drives a $90,000 car.

“I told my wife there were a couple of things I wanted to do in life,” Beisler says, recalling a moment shortly after his second marriage 10 years ago. “‘I’m going to run a company someday and own a big piece of it. I’m going to make us millionaires, and I’m going to drive a Porsche.’”

He accomplished the first goal by rising to president of Qdoba (then called Z’Teca) seven months after joining and investing in the company in 1998; the second in January 2003 after San Diego-based Jack in the Box acquired the burrito chain for $45 million; and the third last summer when—at his wife’s urging, he says—he finally got the Porsche. “I kind of realized a dream,” he declares, wheeling into the parking lot.

Beisler is now trying to realize a new goal: expanding the 150-unit, fast-casual concept into a national brand by emphasizing what he dubs “nouveau Mexican” products. “There’s really no such thing as poblano pesto or cilantro-lime rice in traditional Mexican cuisine,” he chuckles, pointing out one of the chain’s best-selling items, the $5.49 Poblano Pesto Burrito.

No one seems to mind, particularly people eager to sell the product. To date, more than three dozen franchise groups have agreed to open 461 outposts over the next five years, according to a company document. The initial franchise fee is $25,000 per restaurant with royalties of 5 percent of gross sales. Marketing fees are 2 percent of the top line, though franchisees in new markets say they will budget 4 percent to 5 percent of gross sales for promotions.

Wanted: War Vets
Beisler is counting on battle-hardened franchisees from the pizza and burgers wars who can open at least five units. The roster boasts current and former franchisees of Burger King, Papa John’s, KFC and Captain D’s. Franchisees must also understand the importance of food quality and speed of service—two factors that Beisler is betting on. So far, 22 franchisees, with territories stretching from Philadelphia to Los Angeles, are committed to opening 10 or more stores each.

The time seems right to capitalize on the popularity of chain-format Mexican food. Sales at limited-service Mexican restaurants grew 4 percent last year, to $8.1 billion, says Chicago-based Technomic Inc. Only doughnut (5.5 percent) and sandwich (6.5 percent) chains did better.

But can Qdoba happily compete alongside bigger rivals: Wendy’s-owned Baja Fresh Mexican Grill and McDonald’s-backed Chipotle?

“There’s room for all three concepts,” declares Managing Director Michelle Cherrick of SG Cowen. The investment banker helped negotiate the Jack in the Box deal. Venture capitalist Mark Saltzgaber, who considered investing in the chain before its acquisition, agrees: “I believe there’s room for Qdoba [because] Gary’s been able to differentiate the concept from the others.”

Even former Baja Fresh CEO Greg Dollarhyde gives the chain a thumbs up. “They have grown past being small to on their way to being big,” he says. “And with Jack in the Box’s muscle, no problem.”

Beisler and his franchisees have got to step on it nonetheless. Chipotle and Baja Fresh, which number 350 and 304, respectively, steadily grew units by 30 percent or more last year. The category’s largest players, they already dominate some of the lucrative cities Qdoba franchisees are only now entering. One silver lining: Consumers already understand fast-casual food, prices and ordering in these markets. “We won’t have an education curve,” says Tom Gooding, whose first Qdoba opens this month in Greater Cleveland, an area with 14 Chipotles.

Back Stabbers
They must watch their backs, too. Four-year-old Moe’s Southwest Grill, a 135-unit chain based in Atlanta, plans to open 150 franchise units this year alone. Smaller fresh-Mexican outfits like Charlotte, N.C.-based Salsarita Fresh Cantina and Athens, Ga.-based Barberitos Southwestern Grille & Cantina may currently have only a handful of units but are reportedly attracting interest from experienced operators.

Qdoba hasn’t exactly been lax in the expansion department. Should Qdoba open an announced 78 units by its fiscal year-end (Oct. 3), it will have grown 60 percent, a rate that concerns Jack in the Box CEO Bob Nugent. “That’s still too aggressive. I’d like to hold to a 40 to 50 percent rate for the next few years,” he says. Beisler’s team thinks the chain can grow to at least 800 and possibly 1,000 units—counting nontraditional locations like malls and airports—over the next several years. Despite curbing expansion in ’04, officials at Baja Fresh insist the chain will grow to between 600 to 700 by 2008. And Chipotle continues to expand at about 30 percent a year.

Despite backing from Jack in the Box, Beisler admits to his chain’s growing pains. “It’s a tough real-estate environment. It’s always a difficult people environment. We have to be conscious of delivering shareholder value,” he says, adding that conversations with the widely respected Nugent have been very helpful. “It’s great to have an operator like that to turn to and say, ‘Have you ever been in this position? What did you do?’” Beisler explains.

Says Nugent, “We talk a lot, but we don’t micromanage.”

Qdoba plans to open 78 units this year; Beisler’s team thinks the chain can grow to at least 800 and possibly 1,000 units over the next several years.

Beisler refuses to cite specifics about what Nugent has taught him lately. He is mum about most everything that might give his competitors an advantage. He won’t, for example, disclose current unit volumes or company revenues, citing the complexities of public-company reporting since last year’s reform legislation. Jack in the Box says “certain quantitative thresholds” keep it from reporting its wholly owned subsidiary’s sales and earnings.

Beisler is willing to share 3-year-old-unit volumes—$890,000 annually—even though the majority of the outlets are less than 3 years old. He’ll also tell you, sans numbers, that Qdoba has posted positive same-store sales for 20 consecutive quarters. That’s better than Baja Fresh, which reported same-store sales dipped 4.6 percent for ’03. Comps at Chipotle, however, jumped a whopping 24.5 percent last year.

Qdoba franchisees report that sales can vary dramatically from store to store, which may also explain Beisler’s reluctance to divulge performance data. “[Volumes] are so different when you have a chain of 150 units,” says Dan Doyle, a Louisville, Ky.-based franchisee who operates 12 stores in four states. “When we open a new unit in an established market, we tend to have higher-than-average sales. In a new market, where people don’t even know what fast casual is, we open below average, and it’s a different marketing challenge.”

Customer Education
Indeed, Qdoba officials base their promotions on whether a given market is “nascent” or “mature.” Explains Marketing Vice President Karen Guido: “In a nascent market, the customer doesn’t have any idea what kind of restaurant you are. So in that case we need to go in and talk to them about it. In a more mature market, you need to explain the differences.”

Customers can order any of Qdoba’s burritos in a bowl with an optional tortilla on the side.

The chain uses modified panini grills to deliver crisp quesadillas to customers in about a minute.

Those differences, for now, are mainly between Qdoba and traditional fast feeders. To make them clear, Guido produced a radio commercial featuring an “interviewer” and two “employees” who respond to questions about the concept like, “What’s the specialty of the house?” (customized burritos) and, “How many bags of chips do you go through a day?” (none, because they are made fresh daily).

But because of limited resources, Guido relies on menu panels without price points and local store marketing to announce products and spell out differences between Qdoba and the competition. The company shows up, food in tow, at sporting events, radio remotes and even fitness clubs as long as the demographics fit with its customer base. Sometimes, Guido gets a chance to sell food during an event. “That’s really nice,” she says. “You get your name out there and make money to help pay for labor.”

What Beisler and Guido really want is for people to notice the range and flavors of Qdoba’s products vs. all others—something best done inside the restaurant. The idea is to create a menu filled with options that competitors don’t have and yet seem familiar to heavy users of the category, who expect burritos to weigh a pound or more. Chipotle’s menu seems bare-bones—burritos, tacos, chips—compared to Qdoba’s, which features five salsas, three quesadillas, six signature burritos, five standard burritos, nachos, taco salads and tortilla soup.

Says Guido: “When we started we were concerned the menu was too similar to Chipotle’s. So right away we added the nachos, taco salad and tortilla soup.” The chain boosted flavor profiles with mole, cilantro-lime rice and habanero salsa.

To differentiate itself from Chipotle, which focuses on burritos, Qdoba developed a menu filled with more options such as its Tortilla Soup, a spicy vegetarian soup with diced tomates, onions, peppers and cilantro topped with fried tortilla strips.

Research showed that the slogan, “Not just big burritos. Big flavors,” resonated with fresh-Mexican customers.

The tack has its appeal. “It talks to what the concept strength is,” says Doyle, who has used the radio commercial in the Louisville market. “From the standpoint of marketing strategy, I really like Qdoba’s positioning.” Dollarhyde, however, has doubts about marketing on flavor and diversity. “Does the consumer want different?” he wonders, recalling Midwestern customers puzzled by Baja Fresh’s enchiladas without gloppy cheese. “They didn’t know what to make of it.”

Beisler and Guido continue to move the menu away from a strictly burrito focus, the niche all but owned by Chipotle. Focus groups in Indianapolis and Denver and an online survey in several markets revealed a variety of food preferences fitting Qdoba’s format. One is a soon-to-be-tested quesadilla flavor. Guido won’t talk about others. “We are still in the process of figuring out what makes the best sense, so I don’t want to give competitors a heads-up,” she says.

Meanwhile, Beisler has retooled Qdoba’s interiors, which now look more suburban-casual than urban-edgy. The color palette is soft yellow, green and blue. There are booths and carpeting. The seats and trim are made from blond wood, and lighting, if not subtle, isn’t harsh or obvious. (See “Industrial Lite” in the November 2003 issue of Chain Leader, for a close look at the interior.)

On the Line
The service line, like Chipotle’s, begins with tortilla warmers and proteins and ends with salsas and garnishes. Holding timers glow red, signaling safety ranges of meats and sauces. Speed is everything...almost. Customization is a crucial competitive point of difference. At Qdoba, Beisler boasts, workers “wait for you to tell them how you want a burrito made.”

Spokesmen for Baja Fresh and Chipotle say they make food to the customer’s liking, too.

During a busy lunch in a Qdoba near Denver International Airport, staff served most customers in about minute. They warned those ordering quesadillas that it would take longer. Quesadillas, made on modified panini grills, melt cheese and toast the tortilla in slightly less than a minute. Officials say it took a while to figure out how to deliver a crisp quesadilla in such a short amount of time.

“Our goal is by the time you pay up, it’s there. It has not been an issue for us,” Beisler says.

No surprise Qdoba achieves it. Beisler, a Louisville, Ky., native, has been honing his operational know-how ever since joining Wendy’s after dropping out of the University of Louisville his sophomore year. He learned scratch-cooking at long-defunct Fresher Cooker, which he helped expand in Kentucky and Ohio. At Rally’s, where he signed on when there were only 17 units, he rose to COO and became, by all accounts, an outstanding operator.

“He’s a great restaurant executive,” says former Rally’s CEO Doyle. Declares Beisler’s current boss, Nugent: “Gary is doing a marvelous job.”

What next? A Ferrari Scaglietti?