With new CEO Liz Williams at the helm, El Pollo Loco is drawing up a blueprint to drive sales, decrease costs, and ultimately spark new unit growth.
Williams laid out a five-point plan for getting the development flywheel going again during her first earnings recap since joining the company in March. It starts with sharpening the brand positioning and leaning deeper into two key differentiators: better-for-you grilled chicken and Mexican flavors.
“El Pollo Loco sits at the intersection of chicken and Mexican, two of the fastest-growing categories,” Williams said during the company’s Q1 earnings call last on May 2. “We are beloved for our high quality of ingredients, our freshness, and our ability to customize—all for a good value and with the convenience of fast service, oftentimes through a drive-thru. We need to spend more time communicating these messages.”
A strong start to fiscal 2024 shows the brand already has the right building blocks in place. Same-store sales were up 5 percent in Q1. The average check grew 2.6 percent, partially due to higher menu prices, but transactions increased 1.2 percent, too.
Prices were up 6.7 percent year-over-year. In addition to what it was already carrying heading into the quarter, El Pollo Loco took just over 1 percent in price at the start of April, when California upped its minimum wage for fast-food workers to $20 an hour. The vast majority of its roughly 500 units are in the state.
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CFO Ira Fils said the move put some pressure on average tickets and transactions, but “in an area that we’re comfortable with.”
Unlike many of its quick-service competitors, the chain isn’t seeing a sharp drop off in lower-income customers, Williams added. She credited that to options that help stretch the dollar, like a growing assortment of family meals. Demand for healthier, higher-priced items like Pollo Bowls and Tostada Salads hasn’t waned amid a softer consumer backdrop, either.
“We really believe that you’ve got to have everyday value across the menu, first and foremost,” Williams said. “Even some of those more expensive items, like a Tostada Salad, the consumer has to really feel like they’re getting a wonderful, delicious, craveable, and filling meal, even though it might be on the upper end of their price band. So that’s number one. But then in the sub-$10 price range, we’ve got to figure out how to continue to innovate there.”
The company is experimenting with its burrito platform, adding new items and testing them at different price points to amp up the value proposition. And it will continue focusing on bringing “thoughtful innovation and affordable options” to the table going forward.
“Bottom line, we have an incredible opportunity to position the brand for long-term traffic gains,” Williams said.
Efficient and consistent operations are critical for driving those gains. To that end, the second strategic pillar centers around improving the customer experience with a “hospitality mindset.” That starts with clear systems, processes, tools, and a best-in-class training program.
“We know we have an opportunity to drive speed and to make the team member jobs easier, which will also enhance customer service,” Williams said.
El Pollo Loco already has been zeroing in on consistency and operational improvements. Last year it launched an updated operations manual and fresh training materials. It also implemented a semi-annual marination calibration and tested enhanced holding equipment to improve the execution of its signature fire-grilled chicken.
Williams sees plenty of opportunities to continue driving consistency through simplification and labor efficiencies. She pointed to the brand’s salsa offerings as an example. It simplified its lineup last year when it reduced its salsa count from two to one. It followed that up by introducing new equipment that is easier to use and easier to clean.
The chain also is unlocking labor savings with in-store kiosks. It started testing those last year and plans to have them installed in all corporate stores this summer. Franchisees are starting to actively deploy the technology, too.
When combined with a cash machine, in-store kiosks are helping teams serve guests “more efficiently with less labor, especially at peak traffic periods,” Williams said.
That leads to the next strategic pillar: becoming a digital-first business. The goal there is to “unlock a frictionless experience” and “reach customers for whom convenience and value are key decision factors.”
El Pollo Loco has made several investments in consumer-facing technology, including digital ordering through its website and mobile app and integrated third-party delivery. It also has a revamped Loco Rewards program geared toward creating more opportunities for member engagement. That rolled out last spring when the company launched a tier-based rewards platform. It was the first major update since the program launched five years ago, when it was a 1:1 point system with a $10 reward for 100 points.
Williams said there are other investments on the horizon, hinting at “new digital technologies in the drive-thru that enhance the customer experience and further automate ordering.” More details on that front will come as tests get underway.
Restaurant-level margins were 17.6 percent in Q1, up from 15 percent in Q1 of 2023. Williams wants to get those figures back to where they were six or seven years ago. In 2017, for example, store-level margins were around 22 percent.
Returning to that higher range is part of the fourth pillar, centered around delivering “winning unit-level economics” and improving restaurant profitability. Much of that margin expansion will come from labor productivity gains under the second and third pillars. The company also is reviewing everything from COGS to R&M, utilities, and all other controllable expenses.
“While still early in the process, we have identified several areas of improvements,” Williams said. “More importantly, we are doing this methodically to ensure it does not impact our high-quality food or the guest experience.”
Additionally, El Pollo Loco is incorporating a modernized brand image at its stores with a remodeling program that already is showing strong returns and improved sales. Now, it’s looking to incorporate feedback from those sites to further value engineer the updates ahead of a full rollout.
The first four pillars—growing brand awareness, improving the guest experience, fostering a digital-first mindset, and increasing unit-level economics—will help accelerate new unit growth. That’s the final part of the plan Williams hatched during her first few months on the job.
The first priority under that pillar is updating the restaurant design and lowering the cost of new builds.
“Our current prototype cost about $2.2 million,” Williams said. “Simply put, that is too expensive to drive consistent, long-term franchise growth.”
To remedy that, El Pollo Loco is working with multiple partners to reduce the cost of the new prototype it has in the works. At the same time, the chain is aiming to improve its development capabilities by dedicating more resources toward the franchise business. That includes bolstering recruitment efforts, providing a higher level of support for operators, and “thoughtful evaluating” both the market entry strategy and existing market growth plans. The company also recently launched a new development incentive for all of its franchise partners.
Two corporate restaurants and five to seven franchised restaurants are slated to open in 2024, up from the five restaurants that opened in 2023. The footprint is currently at 495 units, including 172 corporate stores and 323 franchised restaurants.
The combination of reducing build-out costs, improving unit-level margins, and offering a meaningful development incentive, together with strong sales growth, is a formula that will reinvigorate the pipeline over time, Williams said.
“We’re just getting into this transformation as it regards to taking cost out of the unit,” she said. “I know the team was really working on it, but I think we didn’t get as far as we needed to get. And then when you couple that with the fact that our economic model wasn’t as strong over the last 12 to 18 months, those are the two things you’ve got to have if franchise partners are going to invest. I feel comfortable that we have a plan on our economic model. I think we’re headed in the right direction. So, now we really have to do the work on the cost engineering of our buildings, and do that very quickly, because we don’t want to wait around.”