Orange County restaurants are feeling the squeeze of rising food costs and slower spending by cash-strapped consumers.
Some companies, including El Pollo Loco Inc., Wahoo’s Fish Taco, Taco Bell Corp., Del Taco LLC and Mimi’s Cafe, are reviewing advertising, introducing value menu items, leaving vacant positions open and searching for efficiencies in construction costs to offset the loss in sales and profits.
“It’s the most challenging environment I’ve seen in years,” said Stephen Carley, chief executive of Irvine-based El Pollo Loco. “It feels like post Sept. 11. In some ways there are additional challenges.”
Carley said higher food prices are eating into profits. Many restaurants are reluctant to pass on higher costs to consumers, who are being pinched by high gasoline prices and adjusting mortgages.
“It’s a very competitive environment in the restaurant business,” Carley said. “Consumers are shopping for the best deal or coupon.”
At El Pollo Loco and several other restaurant companies, sales are ahead of last year but below what they had expected. In the quarter ended June 27, El Pollo Loco’s revenue rose 5.8% from a year earlier to $69.7 million. Operating income fell 5.6% to $8.6 million.
Even fast food restaurants known for low prices have been impacted. Lake Forest-based Del Taco, saw its 17-year streak of positive same-store sales end last year.
President Shirlene Lopez expects sales to remain “soft and flatish” in 2007. The company is trying to boost sales with its new “Feed the Beast” advertising campaign, she said.
Mexican fast food players have been hurt by the “burger wars” being fought by McDonald’s, Jack in the Box and other competitors that have introduced higher-quality meat touted in advertising campaigns.
“They’ve spent an unprecedented amount of resources on media for their big burger lines,” Lopez said. “That’s impacting the Mexican category.”
Irvine-based Taco Bell is under fire on several fronts, including food safety issues after a rat scandal earlier this year and an E. coli outbreak in 2006. Same-store sales in the quarter ended June 16 declined 7% at the chain, owned by parent company Yum Brands Inc. in Louisville, Ky.
Other companies are pinned in the trenches as well. Tustin-based Mimi’s Cafe dragged down quarterly results for parent company Bob Evans Farms Inc. in Columbus, Ohio. In the three months ended July 27, same-store sales at Mimi’s fell 0.7%.
Not every chain is struggling, however. BJ’s Restaurants Inc. of Huntington Beach reported another solid quarter ended July 3 in spite of the “ongoing challenging operating environment,” said Chief Executive Jerry Deitchle in an earnings release. Revenue rose 37% to $79.3 million, while profits increased 4%. Same-stores sales increased 7.5%.
At Carlsbad-based Rubio’s Restaurants Inc., profits rose 14.6% in the second quarter while revenue increased 15.9% to $43 million as the company continued moving away from a low-price push and focused on quality. Same store sales increased 7.8%.
“It’s a mixed message,” said Randy Hiatt, president of restaurant consulting firm Fessel International in Costa Mesa. “There are still some that are doing well out there.”
But the softness will most likely discourage operators from launching new types of restaurants, he said.
Sales are up this year but below projections at Santa Ana-based Wahoo’s Fish Taco. To compensate for rising food costs and slowing sales, the company is leaving some positions vacant to manage expenses.
“We have to be more efficient,” said cofounder Wing Lam. “Everybody has to pitch in and pick up the slack.”
Some companies are introducing products and advertising campaigns to stimulate sales. El Pollo Loco came out with two $1.49 tacos to appeal to those on a budget. Del Taco launched its “Feed the Beast” television and radio commercials and got a bounce from a new shredded beef introduction.
So far, the slowdown hasn’t impacted expansion plans at most chains. Wahoo’s still plans to open five to 10 locations a year, including restaurants in Long Beach and Fresno in September. Del Taco is on track to open 10 company-owned restaurants this year and 20 to 23 franchise locations.
While El Pollo Loco still plans to open 10 company-owned stores and 20 franchisees in 2007, the company is “taking a hard look at how it’s going to absorb the construction costs,” Carley said.
As a result, El Pollo Loco hired value engineers to examine the company’s construction process to find efficiencies without impacting the final product.
Carley anticipates a challenging environment into 2008.
“Nobody is playing golf in the restaurant business these days. I can tell you that much,” Carley said.
