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Systems Go: Chronic Tacos Charts Overseas Growth

Yesterday Aliso, tomorrow the world.

Chronic Tacos Enterprises Inc. plans to open its first international location next month in Japan, the first of 15 franchised locations in the country, and the first of far more if its majority owners—four brothers who bought 75% of the Aliso Viejo-based Mexi-Cali fast casual chain in 2012—have anything to say about it.

Dan, Dave, Joey, and Mike Mohammed do have something to say about it, though they’re leaving the doing of much of it to local experts, from franchise groups overseas to how to find prospects.

“We did a trade show a year ago in Japan,” says Mike, chief executive. In September it signed K&B Brothers to open locations. It’s an affiliate of restaurant operator Kadoya Group in Tokyo.

“They’re committed to 15, but they’ll tell you they want to do a hundred,” he says. “They have all of Japan.”

Chronic had 43 restaurants with $24 million in systemwide sales at the end of 2016, good for the No. 33 spot on the Business Journal’s list of Orange County-based restaurant chains.

Its 50th opened in November at the University of California-Riverside. With early 2018 openings, it has 53, six corporate, and has done deals for 90 more.

The first in Japan opens on March 8 in Tokyo’s Ginza District.

Starters

It’s just the beginning, Mohammed says.

Chronic’s trade show reps—it hired East-West franchise consultants I. Fujita International in Torrance to handle its presence at the show—did the event again this year, and is now looking to South Korea, Malaysia, the Philippines and Thailand.

Mohammed says China is less likely right off because of its reputation for difficult maneuvering. Bigger restaurant brands and U.S. companies in general have stumbled several times in pursuing China expansion, on food issues, government restrictions, or navigating a vastly different market.

“We want to prove the concept first,” Mohammed says. “International has to be a disciplined approach.”

He talked with other OC-based franchisers about foreign markets and possible pitfalls—“we were careful”—and in the end, Japan, with its many cultural connections to the West, seemed a good place to start.

“We’ll get Japan open and learn from it.”

Chronic is also hitting a multiunit franchisee event in Las Vegas in April and another international-focused one in May in New York—which tends to attract European and Middle Eastern prospects.

Lessons learned aren’t unlike those franchisers find in general when starting up.

Chronic was founded in 2002 in Newport Beach by Randall Wyner and Daniel Biello. It amped up the edginess; as Wahoo’s Fish Taco went for the laid-back surf feel of the 1950s, Chronic dug much further back, culling OC’s Mexican heritage and even going a little funereal with its Day of the Dead-inspired design.

It began franchising in 2006. Within a decade of its 2002 founding it hit snags.

It had 26 locations in 2012 and was largely a SoCal brand—though the Mohammed brothers, real estate investors from Canada, found it in their home country when the chain opened there.

They bought in, and in retrospect it may have been just in time.

Yesterday

Chronic reported a net loss of $105,000 on revenue of $1.2 million in 2013, state filings show.

The brothers had to shutter underperforming stores.

“We closed five right out of the gate” and about 10 total, Mohammed said.

Others closed as 10-year leases began to run out in 2016. Some franchisees left the brand, and a couple needed to move because of neighborhood and demographic changes, he said.

The brothers began to implement systems and build a franchise team, leading many of the efforts themselves.

Mike, 44, is also president and “unofficial” chief financial officer. Dan, 41, handles development and Canada operations. Joey, 37, is art director. Dave, 35, is marketing director.

“We had to build the platform. We’re very hands-on, do everything in-house,” he said, including franchise sales. “It’s so important that it’s a cultural fit for us.”

A smartphone app arrived last year.

Wyner is still involved with the company, and Biello runs locations in Newport Beach and Corona del Mar. Both still own stakes, Mohammed said.

“Chronic Tacos is a strong brand concept sustainable for future growth,” he told the Business Journal in 2015, as the brothers’ work began to produce results.

Chronic had a net loss of $54,000 on $1.2 million in revenue in 2014 before swinging to profits of about $364,000 in both 2015 and 2016 on revenue of $1.5 million and $1.9 million, respectively.

Today

About that time—processes in place and profits posted—Chronic began to sell U.S. franchises.

When Mohammed spoke with the Business Journal three years ago, Chronic had 28 locations: 24 in California—half in OC—three in British Columbia, and one in Las Vegas.

It’s added restaurants at increasing rates—three in 2015, nine in 2016. At year-end 2016 it had deals signed for 21 locations, and now has the 90 Mohammed mentions.

Most are domestic.

n North Carolina got its first—the first East Coast site—in 2016; two were added last year.

n Alabama came on board that year; a second came last year; and a third arrives this year.

n Florida joined last year, and two more are coming this year.

n Georgia and Tennessee are signed and in development.

Del Taco and Taco Bell have also targeted the Southeast. Mohammed said the region likes California brands, “and Chronic is scoring points with its edginess and distinctiveness: “California-Mexican versus Tex-Mex.”

He said he thinks the chain’s “artistic” approach will do well against “concepts there already that are more cookie-cutter.”

Franchisees include one-offs in a tourist town where the operator has two other concepts; multiunit franchisees that span states; a former Taco Bell operator; and multiple indie operators in larger states.

Tomorrow

Hawaii and Washington were added last year and are building on the base this year; Idaho is also on Chronic’s map. Arizona grew modestly through 2016 and 2017, and Canada will get a few more: a corporate site in downtown Vancouver—Chronic affiliate CTE Restaurants LLC owns corporate locations—and a multiunit franchisee plans to open Alberta and Saskatchewan locations at year-end.

Its Cali-centric dependence has fallen to half of its units, and more diversification is likely as expansion accelerates.

It’s pushing for 150 over the next five to 10 years, even with no additional international operators.

“We want to be more than 100, but we try and [do it in] chunks,” Mohammed said.

It should be at 75 by year-end, he said, and 100 by the end of next year.

Franchise filings show sites bring in $671,000 to $1.2 million apiece, $875,000 at the median, and a cross-section of 10 Chronic Tacos averaged $936,000.

Earnings before interest, taxes, depreciation, and amortization are 11% to 16%, with a median of 13%.

It costs $300,000 to $800,000 to open a location, including franchisee fees of $40,000 to $45,000. Royalty and advertising fees are 9%.

Tweaks

The brothers have also been in that learning curve.

“We have to go through these processes each time we grow,” Mohammed says. “Each time you expand, you learn about what’s working and what’s not.”

When “we were at 26 [locations], we had to ask, ‘What do we need in place at 100?’” and now that Chronic is closer to 100 than to when it had 26, closer to $1 million in net income than the $100,000 loss the year after the brothers bought in, they ask themselves and others questions about exponential growth, overseas markets, and problems of a much larger company.

When “you get bigger, you attract different people,” Mohammed says. “What kind of franchisee do we want?”

Questions get as specific as the food itself.

The Japan location anticipates high traffic from a late-night crowd and plans to offer table service in the evenings with tapas and snack items the chain doesn’t offer in North America, for instance.

Then there’s the burrito.

“We have a monster burrito” on the menu, Mohammed says. When Chronic began looking to Japan, “They told us, ‘Nobody’s gonna order this.’”

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