Fast-Casual Food Wave of the Future

— If you see some silk-suited slicker snooping around your favorite taco shop, he's probably from Wall Street. The investment community has gone gaga over so-called fast-casual Mexican restaurants, and two San Diego-based public companies, Jack in the Box and Rubio's Restaurants, have Wall Street salivating again. Other local dining places could catch the wave too: maybe that burrito joint you love will one day become a hot initial public offering, and the guy who makes guacamole in the kitchen will become a billionaire.

A fast-casual restaurant is a hybrid between a fast-food place and a full-service sit-down restaurant. The fast-casual category should grow by 10.8 to 12.5 percent a year through 2009, double the rate of the overall restaurant industry, according to Chicago's Technomic, Inc., a food-service research firm. In 2004, Mexican food at such restaurants grew at 8.7 percent, double the industry rate, says Technomic.

At a fast-casual restaurant, you get the food quickly, but there are no waiters or waitresses. There is ambiance. Ingredients are higher priced, and the bill is a bit stiffer: about $7 to $10 per person.

That's more than you'll pay at Taco Bell, the fast-food chain that has 58.4 percent of the combined fast-food and fast-casual Mexican restaurant market, according to Technomic.

Excitement hit January 26 when a Colorado company named Chipotle Mexican Grill went public at $22. That same day, the price more than doubled to the mid-$40s and has come down only slightly since then. It's one of the hottest initial public offerings of the year, but it's a little scary: new issues of fast-food stocks sizzled in the 1960s, and the stove got so hot that eventually the whole market boiled over. Then everything went to blazes, and the U.S. suffered the worst bear market since the 1930s Depression.

But Chipotle seems solid. Sales leapt from $203.9 million in 2002 to $468.6 million in 2004. It has 489 outlets and will add 80 to 90 this year. The stock zoomed even though hamburger chain McDonald's owns 88 percent of it, and each McDonald's share has ten votes while each share owned by the public has one. McDonald's, a competitor, has effective veto power over key corporate decisions, such as mergers. Democracy it ain't, but investors are still lapping up Chipotle stock.

Also, Chipotle's internal growth is slowing. As recently as 2003, sales in outlets open at least a year (called comparable-store sales) rose 24.4 percent. This year, they are expected to rise only 2 to 5 percent.

The same day Chipotle went public, January 26, the stock of San Diego's Jack in the Box soared from $36.98 to $41.55. The Internet chat rooms and some analysts speculated that Jack stock was carried along by the Chipotle moon shot. On January 26, analyst Joseph Buckley of Wall Street's Bear Stearns raised his rating on Jack. Buckley said that Jack's Qdoba chain of Mexican fast-casual restaurants -- a Colorado company that Jack purchased in early 2003 -- would help Jack stock get some of the glow from the Chipotle upride, even though Qdoba represents only 2 percent of Jack's revenue.

In ensuing days, Jack stock leveled off and inched down below $40 again, but it's still above the pre-Chipotle level. Stock of Carlsbad-based Rubio's Restaurants rose from $9.70 to $9.93 that day and continued to creep up and hang around $10. In a sense, Rubio's can be called one of the pioneer fast-casual Mexican chains. The first Rubio's opened in Mission Bay in 1983, featuring "The Original Fish Taco," still its mainstay.

But since its public stock offering in 1999, it has had modest profits and three loss years while expanding rapidly. The stock price has not come back to the $16.50 it hit after its public offering. As an investment, Standard & Poor's says that Rubio's scores lower than 85 percent of the companies it follows. Stock-rating firm Morningstar, Inc., gives Rubio's a grade of D for growth rates and C-minus for profitability. But it gets a B grade for financial position: the company has no long-term debt.

In the last fiscal year, Rubio's sales rose only 2.4 percent. Comparable-store sales edged up just 1.2 percent. However, the fourth quarter looked better: sales jumped 5.1 percent, and comparable-store sales rose a sturdy 4.3 percent. In November 2004, Sheri Miksa was appointed president and chief executive officer. Thirteen months later she was gone.

Despite its wee size, Jack in the Box's Qdoba has outshone the bulwark hamburger/sandwich chain. Last year, Qdoba's revenues shot up 53.4 percent to $58.4 million. The previous year, they had gone up 90.3 percent. Last year, earnings from operations were $4.4 million, up 159 percent over 2004, according to Rachael Rothman of Merrill Lynch.

The traditional Jack in the Box sandwich shops have 2049 outlets; Qdoba has 250. But this year, the parent will open 45 to 55 Jack in the Box outlets but 85 to 95 Qdoba restaurants. The stepping up of Qdoba's expansion "is a smart move," says Morningstar. "Qdoba has excellent prospects."

Same-store sales should rise 4 to 6 percent this year. That's about half of what they were last year, but that kind of performance is still good. Double-digit comparable-store sales can't continue for any consumer company.

Jack in the Box has had good and bad experiences with Mexican food. "We've included tacos on our [Jack in the Box] menu as far back as anyone can remember," says spokesman Brian Luscomb, and tacos are still a top seller, along with stuffed jalapeños and chicken fajita pita. However, the company bombed out in 1988 when it took on debt to buy a Mexican chain, Chi-Chi's, that it eventually sold at a big loss.

According to Technomic, of the 500 largest fast-casual chains in 2004, Chipotle was third biggest, Baja Fresh Mexican Grill 5th, Rubio's 16th, Qdoba 17th, Moe's Southwest Grill 18th, La Salsa Fresh Mexican Grill 25th, Wahoo's Fish Taco 33rd, and Taco Del Mar 34th. Of the total fast-casual market, Chipotle has 5.9 percent, Baja Fresh 4.8, Taco Cabana 3.0, Rubio's 2.8, Qdoba 1.8, and Moe's Southwest Grill 1.7, according to another industry source.

Larger restaurant companies have been gobbling up these fast-casual Mexican chains. La Salsa is owned by Carpinteria's CKE Restaurants, which operates Carl's Jr. and Hardee's chains. However, La Salsa has 101 units -- barely above two years ago. Baja Fresh is part of Wendy's, the third-largest hamburger chain, although Baja's comparable-store sales in the fourth quarter plunged 3.7 percent, and the parent had to take a $190 million write-off on its Mexican chain in the same quarter a year earlier. Its once-surging store count is shrinking slightly too.

Burger King, the second-largest burger chain, intends to go public later this month or in early March. With money in the treasury, it might try to diversify by buying some of the smaller Mexican fast-casual chains. Wendy's plans to sell a portion of its Tim Hortons coffeehouse chain the same way McDonald's sold part of Chipotle. Some gossips say Jack could do the same with Qdoba and rake in some money on the deal, but Jack isn't talking.

A potential problem for San Diegans is that when companies try to please only Wall Street, product quality can suffer. Rubio's has 43 locations in the county, and Chipotle, Baja Fresh, La Salsa, Wahoo's, and Taco Del Mar have outlets here too. Cross your fingers that the taco shells don't get stale.

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