El Pollo Loco is in the testing phase on several fronts. A handful of initiatives are underway at the fast-casual chain that could bring about big changes to the customer experience later this year.
CEO Larry Roberts said one “especially promising” initiative is self-ordering kiosks, which have been installed at 10 company-operated restaurants. A few key findings are emerging from the test that will help shape the company’s approach going forward.
“One is that the kiosks need to be at the front counter. You don’t want to have them elsewhere in the restaurant, because we’re seeing a much bigger response when they’re at the front counter,” Roberts said during the company’s Q1 earnings call. “We also are finding, for our customers at least, that you want to have cash machines available … We’re finding that where we have cash machines, the usage is much higher.”
El Pollo Loco is expanding the test to 10 additional company-owned restaurants. Several franchisees will install kiosks in the coming months, too. Stores that see high usage will begin experimenting with reallocating and possibly removing labor.
“The bottom line is we are seeing good average check growth across the board,” Robert said. “Provided we continue to see positive results, we expect to accelerate the program later this year.”
Another initiative currently in the testing phase centers around new menu boards that are designed with two key goals in mind. The first is making it easier for consumers to understand and navigate the menu. The second is identifying new items and platforms that will resonate with guests and build sales over the long term. The company is experimenting with a variety of items that could be added when the new menu boards are rolled out, including add-on snacks, stuffed quesadillas, hard-shell tacos, beef, and new beverages. Depending on the results, it expects to launch a revised menu and menu board this fall.
El Pollo Loco also is developing multiple catering concepts that it will screen with consumers, with an eye toward launching a new catering program later this year. Catering represents around 1 percent of the company’s total system sales today, but with the right program in place, Roberts believes it has the potential to be a significant sales layer for restaurants.
“The program will offer more options for customers versus our current focus on chicken on the bone,” he said. “We believe providing more variety is more in line with the way consumers are eating in groups today, especially in offices.”
While the company continues testing kiosks, menu boards, and catering concepts, it already is benefiting from several initiatives launched earlier this year. This spring it debuted a revamped app and loyalty program. The changes make it easier for customers to order food through the app and provide more opportunities for engagement and food redemption.
“The new app has been well received with a 4.5 star rating, while sign-ups for our loyalty program have roughly doubled versus prior trends,” Roberts said. “We expect both the app and the loyalty program will only get better as we continue to update them and make them even more engaging for our customers.”
El Pollo Loco earlier this year hired a new creative agency to bring a fresh look and energy to its advertising. The marketing approach debuted with the Double Chicken Tostada LTO that began in late February. Despite it being the company’s third consecutive year promoting the product, Tostada sales achieved a record mix of 19 percent during the promotion. The product continues to mix at around 15 percent post-promotion, which is up from 13.5 percent pre-promotion.
To add some context to the success of this year’s LTO, Roberts said that just two years ago, Tostadas represented 8.5 percent of the company’s sales mix.
“By consistently promoting a very differentiated product, we’ve nearly doubled their sales mix in just two years,” he said.
The company this spring brought back its Shredded Beef Birria as an LTO for the second year running. While matching last year’s record performance is proving to be a challenge, Roberts said the product is driving frequency and attracting new customers. It also is providing additional feedback as the company assesses adding beef as a permanent menu item.
The chain just managed to scrape out positive same-store sales growth in Q1 despite lapping last year’s highly successful Beef Birria promotion. Systemwide comps were up 0.8 percent, including a 3.8 percent increase at company-owned restaurants and a 1 percent decline at franchised restaurants. The comps growth at company-operated restaurants consisted of a 6.3 percent increase in average check size due to higher menu prices, partially offset by a 2.4 percent decline in transactions.
Roberts said unprecedented weather in California cut into comps sales by 2-4 percent. While other restaurants have said in recent earnings calls that weather on the West Coast was a non-issue in the quarter, he’s confident that heavy rain in the state was the primary culprit behind El Pollo Loco’s decline in transactions and sluggish same-store sales growth. The company measured days that had rain and found a 6-8 percentage point drop in sales relative to non-rainy days.
“I think one reason why we see weather more heavily impact us is that if you go into an El Pollo Loco restaurant for lunch time, you see a lot of workers getting their chicken-on-a-bone meals,” Roberts said. “Clearly, on rainy days, many of them are not working, because they’re generally working on lawns, on roofs, painting houses, and those types of things.”
Total revenue increased 4.1 percent to $114.5 million from $110 million in the same period a year ago. Company-operated revenue grew 4.2 percent to $97.9 million. Franchise revenue increased 4.5 percent to $9.7 million, driven largely by the addition of nine new franchised units that opened after Q1 of 2022, as well as revenue generated from four company-owned stores that were sold to an existing franchisee.
The company is making progress at better managing labor and food costs, which is showing up in operating margins. Food and paper costs as a percentage of sales at company-owned restaurants decreased 200 basis points to 27.5 percent, while labor and related expenses decreased 160 basis points to 32.3 percent. Commodity cost inflation moderated substantially to 4 percent from 16 percent a year ago. Restaurant-level margins were 15 percent, a 470 basis point improvement from the same period a year ago, when restaurant-level margins were 10.3 percent.
El Pollo Loco recently signed three franchise development agreements for an incremental 26 new restaurants in three new markets, including Northern Colorado, New Mexico, and El Paso, Texas. Combined with previously signed agreements, it now has franchise development activities underway in a dozen states.
The company saw flat unit growth in the quarter, with one franchised restaurant opening and one company-owned restaurant closing. At the end of Q1, the footprint stood at 490 total restaurants, including 303 franchised units and 186 company-owned units. Three to five company-owned stores and six to nine franchised stores are expected to open by the end of the year.