El Pollo Loco notched a major win last year with its successful Shredded Beef Birria promotion. Served in tacos, quesadillas, and burritos with a side of chips and salsa and consommé for dipping, the breakout product consistently mixed above 10 percent after launching in March 2022. It drove new company, franchise, and system sales records for three straight weeks last spring.
The LTO was so successful that the chain considered adding beef as a permanent menu item and brought back the promotion in Q1 of 2023. The initial results have proved difficult to replicate, though. Systemwide same-store sales were down 3.4 percent in Q2, including a 4.1 percent decrease at franchise restaurants and a 2.3 percent decrease at company-operated restaurants, which also saw a 4.5 percent decline in transactions. CEO Larry Roberts attributed the lower-than-expected sales to the lapping of last year’s successful Shredded Beef Birria promotion.
“I think Birria itself just didn't resonate the second time around, and I think getting away from focusing on chicken actually hurt us,” he said during the company’s Q2 earnings call on Thursday.
El Pollo Loco is already seeing positive trends in Q3. Systemwide same-store sales were up 1.8 percent in the four weeks ending July 26. Comps at company-operated restaurants increased 2.1 percent in that period, while transactions were down just 0.4 percent. The improved sales performance was credited to more recent LTOs, including new Double Chicken Chopped Salads as well as a new Summer Family Meal that comes with eight pieces of chicken.
While the company will continue exploring opportunities with other proteins—it has a carnitas promotion set for Q4—Roberts said future menu innovation and advertising campaigns will primarily focus on the flagship fire-grilled and citrus-marinated chicken.
“It's all around chicken and freshness,” he said. “Our consumer insight data tells us those are the things that really differentiate us in front of consumers. The advertising campaigns, the content on your social and digital channels, product news, and the menu all have to be geared towards driving that differentiation.”
El Pollo Loco has significant opportunities to boost sales through additional menu platforms, he added. The most promising avenue is catering. While catering currently represents around 1 percent of total system sales, Roberts anticipates that figure could rise to 5 percent within the next two years. The company has spent the past few months revamping its catering program with a new menu, and with much of that overhaul completed, the focus is shifting to creating the marketing materials and training programs required to roll out the program later in Q3. It is evaluating third-party catering delivery services and plans to test the use of area catering managers to further drive the program.
“We are very excited about the potential of catering and believe it can become a $50 million to $100 million sales layer for the El Pollo Loco system over time,” Roberts said.
The company also is making progress on its menu board test, which includes several new menu items and potentially a new value menu. There’s been some pullback in frequency among lower-income consumers in recent months, but Roberts said the chain continues to score high on value metrics with a lineup of $5 bowls and fire-grilled combos at attractive price points. The new value menu could include items priced at $6 or $7 with less trade-down potential.
“That would be something we’d look at either in the back half of the year or early next year,” he said. “If it really seems to resonate, we’ll try to get that on the menu. But we’ve got to test our way to that.”
Ultimately, Roberts said growing comps depends on restaurants delivering consistent quality. To that end, El Pollo Loco is seeing ongoing improvements in drive-thru times, customer complaints, and social media scores stemming from a series of operational improvements introduced throughout the past year, including a focus on bench building and enhanced training programs. The company also recently completed a recalibration process with its general managers to reiterate the importance of food quality and ensure consistency and continued availability of its fire-grilled chicken across the system.
Streamlining operations and improving the customer experience remain key areas of focus. Updated salsa processing equipment will roll out to the system later this year. The company’s kiosk test also is yielding positive results. It currently has 11 kiosks in service and is expanding the test to more restaurants with a number of franchisees participating. Overall, Roberts said the test is generating “nice average check lifts” with kiosk usage ranging from 80 percent on the high end to around 20 percent on the low end.
The company is rolling the test program to more stores in Las Vegas, a market that already has a handful of kiosks. The city was chosen because customers can’t use EBT funds at El Pollo Loco stores there due to state regulations.
“In California, we think the usage will go further as we integrate EBT into the kiosk system, because we get a lot of EBT sales here in California,” he said. “In Vegas, they don’t have EBT… and we’re seeing very high usage. In fact, I think we’re going to basically test a restaurant where it’s just kiosk service and see what that does.”
With stores that see high usage experimenting with reallocating and possibly removing labor, kiosks could play an important role in the company’s mission to get restaurant margins back to 18 percent and eventually to 20 percent. El Pollo Loco’s restaurant contribution margin for Q2 was 16.9 percent, compared to 15 percent in the same period a year ago. Roberts said the path to reaching that 20 percent goal will include both sales-driving and cost-saving initiatives.
“I think sales will be the add-on,” he said. “It’s looking at where we can make efficiencies. We’re looking at the salsa processing equipment. I think that’s an opportunity. We’re pushing those [kiosk] tests. That could be a huge opportunity to drive margin improvement. And on the sales line, we estimate that for every 1 percent of catering sales, we get about a 30-basis-point improvement in margins. So, it’s a combination of both. We're not just saying, ‘Hey, we've got to grow sales,’ because we want to make sure that we're also doing it on the cost side.”
On the unit expansion front, El Pollo Loco reduced its unit guidance for 2023 to two company-owned restaurants and three to four franchise restaurants, down from its initial outlook of three to five new company-owned restaurants and six to nine new franchised restaurants. Roberts said the company is continuing to face permitting and construction delays beyond its control. Ongoing economic uncertainty also is causing franchisees to delay their development plans.
“We are going to be franchise-driven in development,” he said. “We’ve got to improve the unit economics, and part of that is from the margin we’re doing, but we’ve also got to push ourselves to find ways to get our building costs down. And then we need to increase efforts to attract new franchisees into the system and make sure that they open successfully.”
El Pollo Loco ended Q2 with 492 total restaurants, including 188 company-owned units and 304 franchised units.