Despite Jack in the Box's hypnotic tacos

Wall street says it can't run Mexican restaurants

"Wet envelopes of cat food."
  • "Wet envelopes of cat food."
  • Image by Andy Boyd

Since its founding in San Diego in 1951, Jack in the Box has sold tacos. Indeed, the Jack taco has consistently been the chain’s most popular product, even though one customer tweeted that it was a “wet envelope of cat food.” The Wall Street Journal quoted a customer saying of Jack tacos: “There are two kinds of people: those who think they’re disgusting and those who agree they’re disgusting but are powerless to resist them.”

The first Jack in the Box stood at 63rd and El Cajon Boulvard.

The first Jack in the Box stood at 63rd and El Cajon Boulvard.

Despite its hypnotic taco, the company can’t seem to run a Mexican restaurant — at least not to Wall Street’s satisfaction. On March 21, Jack completed the sale of its Qdoba chain of Mexican restaurants to Apollo Global Management, a private equity buyout firm. The deal was for $305 million in cash, with Jack making a prepayment of $260 million to retire debt.

On the surface, it would appear that Qdoba had done reasonably well under Jack, the fast-food hamburger chain. Jack bought it for $45 million in 2003. From $45 million in 2003 to $305 million in 2018 appears to be a good return. In 2003, Qdoba had 85 locations in 16 states, with revenues of $65 million. When the sale was announced late last year, Qdoba was the second-largest Mexican fast-casual chain, with more than 700 locations in 47 states, the District of Columbia, and Canada and with systemwide sales of $820 million. That is good growth.

Qdoba interior.

Qdoba interior.

Creative Commons

But then there are Wall Street and its “activist investors.” These are money changers in the temple who believe they know more about running a business — any business — than executives who have been at it for many decades. It matters not if the business is a steel mill, brothel, candy store, tire manufacturer: Wall Street thinks it knows the business best.

In 2016 and 2017, Qdoba had problems. In 2017, its same-store sales (sales in stores open at least a year) declined 3 percent. Restaurant traffic dropped off, although price increases were successful and catering returns rose. This happened during a period in which fast-food chains generally were having troubles with higher wages and a declining demand for fast-food options. Even Chipotle, the Mexican chain that stormed to the head of the pack and became a Wall Street darling, ran into troubles: a norovirus outbreak, a huge data hack, lawsuits, and Wall Street sniping.

Then came the Wall Street attack on Qdoba: Two activist funds bought significant stakes in the company: hedge funds Jana Partners and Starboard Value. The former, which earlier had tried to get Qualcomm to break itself up, had lost more than half its assets in two years as its performance waned. Starboard had taken over the restaurant chain Olive Garden, complaining that its pasta lacked saltiness. Starboard ousted the entire board of the parent company, Darden Restaurants.

Jack stock was weakening at the time this was going on. Management said that it might not be wise to run two different kinds of businesses: fast-food outlets and sit-down restaurants. But the stock bounced up on the revelation that Jana and Starboard were lurking. Wall Street is all about stocks going up. It doesn’t care if top management is all thumbs or the books are being cooked. It just wants rising stocks.

Then Jack hired a Wall Street firm, Morgan Stanley, to study what it should do with Qdoba. The outcome of the so-called study was foreordained: Morgan Stanley would recommend a sale of Qdoba. It did. Jack wrote down the value of Qdoba by $3.6 million. The sale was set up and reported to the media. No one was surprised when Reuters wrote, “Morgan Stanley & Co. L.L.C. is serving as financial adviser” on the deal. Hmmm.

Now for the bad — but totally unconfirmed — word. The publication thestreet.com said back in December that “it is also a serious possibility that Jana Partners and Starboard will stick around to try and pressure Jack in the Box to sell itself to a private equity firm once the Qdoba sale is complete. A number of fast-casual chain restaurants have come under pressure by activists to sell themselves.” I couldn’t get anything out of Jack on that.

Jack’s previous stab at Mexican restaurants was a disaster. In 1968, founder Robert Peterson sold the company to Ralston Purina. But Jack’s management was unhappy, and in 1985 the company piled up $381 million of low-quality (junk) debt to buy itself back from Ralston.

Three years later, Jack bought Chi-Chi’s, a Louisville-based Mexican chain for $230 million. The rationale was that Jack was a fast-food outfit and Chi-Chi’s featured sit-down restaurants. That was supposed to be intelligent diversification, but as you have probably noticed, it is the opposite of the company’s strategy to sell Qdoba now.

To buy Chi-Chi’s, Jack had to take on even more junk debt on its balance sheet. I can remember Jack Goodall, then Jack’s chief executive, telling me he was conservative and disliked debt, but he thought Chi-Chi’s was such a prize that it would throw off a bundle of cash to help work off the debt.

But then things turned south, and not south of the border. Studies came out that Mexican food was very fatty and a health risk. Chi-Chi’s lost money before taxes between 1991 and 1993. Management admitted it wasn’t keeping up with consumer taste changes. Jack, which had almost gone bankrupt because of the deadly E. coli outbreak in 1993, plunked Chi-Chi’s into an Orange County company that included a couple of other dyspeptic restaurant chains. Jack owned 40 percent of this agglomeration, and Goodall headed both companies, each of which was loaded with junk debt. The Orange County outfit went bankrupt but kept operating.

Chi-Chi’s went on, but in 2003, the Pittsburgh area suffered one of the worst outbreaks of hepatitis A in American history. It was traced to a Chi-Chi’s; 4 died and 660 others contracted the disease from eating green onions at a Chi-Chi’s in a mall. Chi-Chi’s this time sold its assets out of bankruptcy to another restaurant chain, which wound up selling some of them to a real estate investment trust.

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Comments

Jack’s TACOs are so bad they’re good, especially when they are on special three for $2 in the middle of the night. Combine them with their “cheesy” (and I don’t mean queso cheesy) hot sauce and you have a midnight munchies snack.

Too bad Jack’s secret sauce is all but gone from its burgers. You can still ask for secret sauce, but it only comes in little packets like ketchup.

Now I have a craving for Jack’s tacos and a plain old burger with secret sauce!

You put it so well, JW. So bad they're good--perfect description. I haven't eaten one for two years or more, even though I hit J-I-B once a week or so. But every time I look at that menu board, I do consider them.

My native San Diegan wife actually worked for J-I-B many years ago. She now asks for Secret Sauce when she orders a burger, and has some fond memories of how the food tasted 'way back when.

Visduh: Does anyone know why management seems to have given up on the secret sauce? I haven't asked. Best, Don Bauder

JustWondering: For the reasons you cite, I sure hope Jack in the Box is not sold to some financiers. They would sacrifice quality for fast bucks. Best, Don Bauder

Cardiff by the Sea's original JBX after the 1970s remodel.

Ken Harrison: It is appealing. Best, Don Bauder

Original 1965 drive thru menu board at Cardiff by the Sea JBX

Damn, what a simple menu back then. And..the Moby Jack.

aardvark: I don't know about the Moby Jack. It doesn't sound too appetizing because of a great piece of literature. Best, Don Bauder

Ken Harrison: Oh, that Jumbo Jack! Best, Don Bauder

Delicious. Jack in the box tacos are so good I drove from Kalamazoo Michigan to Chatanooga TN in 2000? I think? Just for a taco craving while pregnant. No lie. As for this article, had zero to do with tacos. Boo. However my favorite way to order them is "extra cheese, extra well done." the fry em a tad longer and they are greasier. I wanna go out now and get some.

Sportsbook: The column was about finance, not tacos, because finance is my game. That doesn't mean I dislike Jack tacos. Best, Don Bauder

Don ...you should have never mention TACOs and finance in the same article. Let alone the first sentence of an article. Because TACOs will beat our finance every time.

I suppose we can chalk it up to a learning experience. Never too old to learn, eh?

JustWondering: You mean the billionaires on Wall Street don't eat tacos for lunch? Best, Don Bauder

don bauder, I have read your references to "Wall Street" billionaires countless time. But it occurred to me when I read it this time that I don't know to whom you refer. Is it people who work on wall street, or own/run wall street firms? Is it people whose wealth is from the stocks that are traded on wall street? What exactly do you mean when you refer to those "Wall Street" billionaires??

danfogel: To me, a "Walll Street billionaire" doesn't have to be based in New York City. The person has to be in a predatory part of the financial industry -- hedge funds, private equity groups, etc. Also, the person can be in predatory banking -- Wells Fargo, based in San Francisco, is predatory, we now know. The "Wall Street billionaire" doesn't have to be an actual billionaire if he or she devotes his or her career to slavishly serving billionaires. Best, Don Bauder

Aha, a topic for a reference trifecta:

leverage is/ as leverage does/ increasing the fizz/ as well as the buzz

it has no emotion/ keeping no friends/ it's not magic potion/ just what a bank lends

treat it with caution/ do treat it with care/ else abusing its fractions/ might cause you to swear

'course when in a bull/ it will certainly yield/ buckets more full/ wiv wotever you've stealed

but...if in a bear/ be you levered and long/ the loss that you'll wear/ makes you ev'r more wrong

Cassander: That poem possibly outdoes Dylan Thomas and T.S. Eliot, my favorite 20th century poets. Did you write it? There is a lot of truth there. Best, Don Bauder

No, I did not; but thanks. Always follow the money—and the links.

Since we're on it, Edgar Allan Poe (a man beaten up by the market if ever there was) had words to say as well:

I'll tell you a plan for gaining wealth, Better than banking, trade or leases — Take a bank note and fold it up, And then you will find your money in creases! This wonderful plan, without danger or loss, Keeps your cash in your hands, where nothing can trouble it; And every time that you fold it across, 'Tis as plain as the light of the day that you double it!

Cassander: For those thinking of tech IPOs in this market, there is Shakespeare: "Double, double, toil and trouble. Fire burn and cauldron bubble." Best, Don Bauder

How about this one? "For gold conjures up a mist about a man, more destructive of all his old senses and lulling to his feelings than the fumes of charcoal." --Charles Dickens, "Nicholas Nickleby"

dwbat: Or simply this: Greed kills. Best, Don Bauder

Brian Kean: Now we know why the secret sauce seems to be hard to get these days: anchovies. Best, Don Bauder

Glenn Allen: Well, your doctor isn't there shaking a finger at you when you gobble them up. Best, Don Bauder

Mike Murphy: I think we all crave food that are a non-no with health experts. Best, Don Bauder

its the "secret ingredient" that is addictive

Murphyjunk: Or the advertising for the secret ingredient. Best, Don Bauder

I've often wondered why I crave the JitB tacos, and never know what that meat/soy product really is. ?????

OK, I had to go buy 3 tacos at Jack for lunch today. They were as mediocre as I remembered, but filling. Cost $3 including a drink.

Murphyjunk: Every foodmaker wants a product that people become addicted to. Best, Don Bauder

dwbat: $3 and a drink seems cheap to me, even if you considered the food mediocre. Best, Don Bauder

Dwbat: Ha. Did the same thing...since we were all talking about it. Stopped by the JIB on Rosecrans St. Ordered the special 3 tacos and a small soda, $3.23 with the tax. Got six hot sauce packets....certainly not fine dining...but fine for $3.23

Darren: I don't know that it's a meat/soy combination, and I have never asked. Whatever it is, Jack should put it in more of its products. It's Jack's most popular item. Best, Don Bauder

dwbat: Hope it doesn't lead to the devastation of the movie Soylent Green. Best, Don Bauder

JustWondering: I just ate, but you are making me hungry. Best, Don Bauder

"Soylent Green" perhaps, recall when SDPD was rounding up the homeless and relocating them recently when our failures called city leaders finally said enough with the homeless encampments. The smoke & mirrors good luck on part of the city leaders and real estate developers (in cahoots, please know), was the Hep-A scare. They rounded up lots and who knows where they were transported to--the Jack in the Box taco meat processing plant? Of course if you tune Carl DeMaio enough on KOGO, he might say that is a good thing, cheap tacos and getting rid of unsightly homeless so more ballparks can be built, more breweries, more hotels, and more tower condos/apartments. Carl tries to imply all homeless are addicts and not wanting help when the average apartment rent just reached, what $1,980 (+/-) per month. When Carl is homeless and doing remotes with a little microphone and iPhone, we'll have to mock him about what booze or drugs he has abused. Though Donald Trump might just house poor Carl. Sorry for my long dissertation, I covered lots of ground and am grumpy as I did not get my JitB tacos tonight.

Darren: Please don't eat tacos every day. I like your grumpy prose. There is much wisdom in that dissertation that you are apologizing for. Best, Don Bauoder

Oh My Lordy, you're right, tastes like crusty old salty street people.

shirleyberan: Jack in the Box has done very well for a number of years. You may have that opinion, but obviously a lot of consumers don't. Best, Don Bauder

Scene from where the City of San Diego and Port District will expand the S.D. Convention Center. Let's not let the homeless (think inside City Hall they call 'em "Hep-A'ers") get in the way of progress. Gotta love those football player kind of police helmets.

https://www.youtube.com/watch?v=-wa4U6TQlNI

Wow, there sure were a lot of nasty comments below that video. Most of them (Trump supporters) liked the scooping up of humans with bulldozers/garbage trucks, and suggested we do that today.

dwbat: The hate mongers have seemingly taken over. Consider this: The U.S. -- my country -- is taking five year old children from their mothers and sending them far away, often losing track of them. The administration defends this cruelty, saying it deters immigration. This is worse than outrageous. Best, Don Bauder

Darren: Taxpayer-financed convention centers are the biggest corporate welfare scam around. Also, convention centers are vastly overbuilt, causing prices to tumble 50 percent. Every city is losing big money on convention centers, but many want to expand what they have. Please go to our search engine and look for my convention center columns. And also read "Convention Center Follies" by Heywood Sanders. Then pass the word to everyone you know. Best, Don. Bauder

Today, May 28, 2018, is the national observance of Memorial Day. May 28th is also National Burger Day, JIB emailed me a BOGO coupon. Just enjoyed one of my favorites as a kid, just a plain regular hamburger with Jack’s secret sauce. While it was more than the .39¢ I remember as a kid, it was 50% of today’s menu price.

And, no, no it did not remind me of Soylent Green.

JustWondering: Are you going to demand a re-run on July 4? Best, Don Bauder

Sad times we have when lots of the AM radio talk hosts (locals, or what is left of them) seem to denounce the homeless as mere losers, addicts, and more. There is little empathy, compassion with these radio hosts. At least KPBS-FM still does many shows on the housing crisis, the serious situation with "affordable housing" and more. Don, thanks for the comments, I appreciate it, I will do that search on the convention center fraud. It seems like the booty had over convention centers and sports stadiums, is a major focus of so-called city leaders, not the issues of affordable housing or minimizing our taxes. Wait until the new San Diego Convention Center expansion is railroaded on us, the occupancy tax on lodging (hotel/motel) is gonna skyrocket!! But the tourists don't check this out, and the City of SD's true attitude of homeless is "who cares?" Lots of candy dressing/window dressing. Can you tell I did not have my 4 JitB tacos last night?

Darren: Taxpayer money should go to lots of long-neglected things: the infrastructure, the homeless, for example. It should NOT go to subsidizing billionaires' sports teams or expanding a convention center when U.S. centers are so horribly overbuilt that prices have been cut 50 percent. Best, Don Bauder

Our country leaves elders on the street to die, encourages hate, tortures animals, uses children as pawns and shoots young women who fail to recognize border death politic... In serious need of enlightenment; education, personal development, compassion. Administration of guilt has shamed US. The Seeker-Mueller has additional constitutional reciprocation subpoenas soon. Newton's third law: For every action, there is an equal and opposite reaction... America = New World

shirleyberan: We are definitely in need of enlightenment, especially when the cruelty you cite is championed by so-called religious leaders. Best, Don Bauder

shirleyberan: This is why the U.S. is held in contempt throughout the world. Best, Don Bauder

Doug Kelimoff: Real shredded beef? And it didn't last? No, I don't remember. Best, Don Bauder

I think I will avoid asking for shredded beef from now on in Jack in the Box. Don't know why. :-?

Getting back to the original point of Don’s story.

Today Qdoba announced it would begin hiring 100 people to take over tasks that FoodMaker was doing when the two companies shared one roof. Even though Qdoba has no food store outlets, except one in the San Diego Airport, it’s keeping its corporate HQ here in San Diego rather than returning to its Denver roots.

In separating itself from FoodMaker many administrative functions such as, accounting, HR, finance, IT and marketing were previously handle by FoodMaker staff. As a new separate entity Qdoba now needs employees to preform these tasks.

While this is good news for San Diegans looking for these types of jobs, I’m really just wondering if their tacos have the same allure as the JIB ones have? Sadly, with no outlets other than the Airport it will be next to impossible to find out.🤷‍♂️

“Foodmaker” never owned Qdoba. After some leveraged buyouts and IPO’s, Foodmaker changed it’s corporate name to Jack In The Box in 1999 and listed as JBX. In 2003, Jack in the Box Inc. entered the fast-casual restaurant category by acquiring Qdoba Restaurant Corp., operator and franchisor of Qdoba Mexican Grill.

Ponzi: I hope I didn't say that Foodmaker bought Qdoba. You are correct. Best, Don Bauder

JustWondering: After Jack bought Qdoba, I tried both it and the then-surging Chipotle. I found Chipotle most appealing. I asked a business which was near both a Qdoba and a Chipotle. He said the latter got the most business by far. But this was a non-scientific test with a tiny sample. Best, Don Bauder

Two fast food Titans, McDonals, (Chipotle) and Jack in the Box (Qdoba) battling it out for a niché, but ever growing market. Now that Qdoba is going it alone without the massive corporate backing and interest, wonder how they’ll do?

JustWondering: McDonald's made a bundle from being an original angel for Chipotle. But Mac apparently sold too soon. Now, however, Chipotle has come back to earth. It will be interesting to see if Qdoba can make it on its own. Best, Don Bauder

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