Article

Salsarita's positions itself for growth

Financing options and a possible sale are two areas the fast casual chain has started to explore.

June 13, 2010

By Lisa Bertagnoli

In 10 years, 80-unit Salsarita's Fresh Cantina has worked hard to compete with the giants in the $4 billion Mexican fast casual segment. There's 1,000-unit Chipotle Mexican Grill, a publicly traded firm; 500-unit Qdoba Mexican Grill, owned by Jack in the Box Inc., and 400-unit Moe's Southwest Grill, whose parent company is Focus Brands.

Bruce Willette, majority shareholder and chair of Charlotte, N.C.-based Salsarita's, hopes to level the financial playing field soon. In early June, Willette announced that Salsarita's is exploring financing options, including a possible sale.

A handful of unsolicited offers sparked the formal announcement, as did a hard look at the financial realities of fast-casual Mexican, Willette said.

"Four of our larger competitors have substantial resources to support franchisees and staff," he said. "We've done a bang-up job, but at some point in time you have to put on weight to fight in a heavier weight class."

Willette expects a deal to materialize within 120 days and analysts say that's possible if potential buyers see a future in Salsarita's. The company has experienced six months of consecutive same-store sales increases and annual systemwide sales of about $55 million.

"Equity investors look for growth prospects," said Bob Bielinski, managing director and leader of the restaurant-industry practice for New York-based corporate finance firm CIT Group Inc. "They are looking for a bit of a bigger picture."

While the financing situation for fast casual chains is much brighter than it is for the ailing quick- and full-service segments, competition among Mexican chains is stiff.

"This whole segment is a footrace to gain market share," said Dennis Lombardi, executive vice president, foodservice strategies at WD Partners, the Columbus, Ohio-based restaurant design and consulting firm. Chipotle and Qdoba, he adds, are "extremely well focused, well positioned brands that operate extremely well and have a lot of capital behind them."

Carving out a niche

Meanwhile, Salsarita's is working on perfecting its niche in the Mexican segment with a bar program, distinctive service and a flexible menu.

Almost every Salsarita's location offers beer and wine, and several units, including one in Myrtle Beach, S.C., and downtown Buffalo, N.Y., have full bars. Beverage alcohol gives the concept an edge at dinner, which now accounts for about 35 percent of business. It also adds operational challenges, such as applying for a liquor license, hiring and training bartenders, and hiring waitstaff old enough to serve alcohol.

The average traditional Salsarita's Fresh Cantina has 75 to 90 seats, and takes up 2,200 to 2,600 square feet. Click here to view a slideshow of Salsarita's.

Service is another niche: "In our motto, after you pay the service begins," said Paul Mangiamele, Salsarita's president. Staffers called Guest Service Specialists work the room, helping with seating, getting drink refills and even escorting guests to cars, umbrellas in hand, on rainy days.

To keep service sharp, Salsarita's has invested in training. Last year, the company introduced proprietary online training modules under the banner of Salsarita University. General managers, hourly employees and franchisees all go through a basic training model online. The program is currently being translated into Spanish as well. Since instituting the online training program, retention across the board has increased significantly, Mangiamele said.

Fine-tuning the menu

Burritos - available as the guest wants them - are Salsarita's signature. The company is rolling out a new shrimp-and-Angus steak burrito, which did well in test and can help boost dinner business, now at 35 percent of total sales. Pizza has been on the menu for several years and a build-your-own model, based on a tortilla shell, is in the midst of rollout. The chain also is testing a fish taco.

Breakfast catering, rolled out last year, has been so popular that Salsarita's is adding breakfast at several locations, depending on need. The core menu includes a breakfast burrito, taco and quesadilla ($1.70 to $3.49) and a combo platter of three side dishes (eggs, potatoes, sausage or bacon, for $3.49).

All this builds on a 2009 menu revamp that has reduced inventory, improved the flavor profile of some dishes, improved food costs and streamlined offerings. Mangiamele said that five menu items were eliminated and 10 to 15 were re-reciped. The result: A base menu of 150 items and a food cost of about 30 percent, compared to 35 percent to 36 percent previously.

Growth potential

Salsarita's has a presence in 18 states, and mostly secondary markets in the Southeast such as Charlotte, Nashville, and Knoxville, Tenn. All but two locations are franchised with the concept's biggest franchisee being Charlotte-based Compass Group, which runs 13 nontraditional locations (HMS Host runs another three).

Salsarita's hopes to add 10 to 14 new stores this year.

"I'd like it to be at a 25- to 35-store pace, but that's impossible with the economic environment," Mangiamele said, adding that Salsarita's hopes to reach the 200-store mark by 2015.

That, and perhaps even more robust growth, is a distinct possibility, should the right financial partner step up.

"Of all the subcategories, fast casual has the easiest access to capital," said R.J. Hottovy, senior analyst, restaurants and retail, for Chicago-based Morningstar. "The market is pretty robust, as long as the concept shows growth potential."