Post Baja Fresh: State of the fresh-Mex segment

Has fresh-Mex gone loco this year? At the very least, it's certainly been an intriguing year for this fast-casual segment.

 

In January, Chipotle Mexican Grill served up an initial public offering worth $173 million. Store counts for Qdoba and Moe's Southwest Grill exceeded 300-plus this year, and several smaller chains announced franchising plans, including Desert Moon Mexican Grill and Pyrogrill.

 

But not all fresh-Mex chains are thriving. In addition to reporting flat same-store sales, Rubio's has settled a "truth-in advertising" class-action lawsuit and has only recently hired a new chief executive. CKE Restaurants' La Salsa Mexican Grill also has struggled. As of its second quarter, La Salsa's store count dropped to 98 from 101.

 

Then there's Baja Fresh.

 

Wendy's International Inc. said it would sell the struggling restaurant chain for about $31 million to investor David Kim. Four years ago it paid $275 million for the chain. Those within the Wendy's system knew something was going down sooner or later, said Traci Mills, marketing director for Cedar Enterprises, which owns and operates 134 Wendy's and one Baja Fresh.

 

"I really wasn't shocked because I heard some rumors that maybe it was going to be sold," said Mills, who learned of the sale via e-mail.

 

She said Cedar was discouraged with Wendy's management of Baja Fresh and hopes Kim can turn around the once-promising brand. She said the Baja Fresh menu was complex, and there were many advertising and marketing challenges. Improving brand recognition has to be the new owner's top priority, Mills said.

 

"I'm hopeful it will be in better hands," she said. "Wendy's had a lot on their plate. They have their own flagship brand they need to worry about."

 

In a recent news release, Wendy's said it's focusing completely on the Wendy's brand, which has turned positive numbers since announcing the sale of Baja Fresh. (Company-owned same-store stores increased 4.1 percent for the third quarter ended Oct. 1, 2006.)

 

"This transaction, as well as our September 29 spin-off of Tim Hortons, will allow us to sharpen our focus on the Wendy's brand," said Kerrii Anderson, interim Wendy's chief executive and president. "We wish all the best to the employees and franchisees of Baja Fresh."

 

Unloading Baja Fresh may be good for Wendy's, but what about the rest of the fresh-Mex category. Will the sale impact other operators?

 

No way, said Matt Andrew, senior vice president and brand leader of Moe's Southwest Grill. "I don't think it's troubling at all for the industry," Andrew said. "If you polled Chipotle, us and Qdoba, I think you'd find this category is doing just fine."

 

Andrew said Moe's year-to-date same-store sales are up 5 percent. According to Technomic's Top 100 Quick Casual Report, both Chipotle and Qdoba are growing at a rate of 27.1 percent and 40.1 percent respectively.  Even Taco Del Mar has grown at an impressive rate. Within a year, its restaurant count mushroomed from 111 restaurants to 211.

 

There's no doubt the fresh-Mex segment is experiencing explosive growth, said Keith Goldman, vice president of operations for California Tortilla, a 21-unit concept based in Maryland. Since announcing franchise plans in 2004, California Tortilla has opened 16 franchised units.

"Baja (Fresh) seems to be the only one having difficulties," Goldman said. "I think by and large people, especially the Baby Boomers, have graduated from fast-food (Mexican) and are willing to pay seven or eight bucks for their meal."

 

That can only mean positive sales for the fresh-Mex category, Goldman said.

 

"It's just a hot segment to be in right now," he said.