Many quick-service chains reported softer sales and traffic in the first half of the year, but a focus on “everyday value” and “consistent operations” has helped El Pollo Loco navigate an increasingly pressured consumer environment, CEO Liz Williams said during the company’s mid-year earnings call last week.
Same-store sales were up 4.5 percent in Q2, with restaurant-level margins increasing 170 basis points to 18.6 percent. Total revenue was $122.2 million, up from $121.5 million in the same period a year ago. Net income grew from $7.1 million to $7.6 million.
The increase in comparable restaurant sales included an 8.8 percent increase in average check size and an approximately 5.2 percent decrease in transactions. During the quarter, the company’s effective price increase versus 2023 was 7.8 percent.
“It has been a challenging macroeconomic environment for the restaurant industry and consumers as a whole in recent months,” Williams said. “While some may see this as an obstacle, we see this as an opportunity to showcase to our guests that El Pollo Loco is one of the unique restaurants that can offer portable, craveable, fresh food, all for good value and with the convenience of fast service.”
She added that “everyone is seeing the trade-down effect” but said it is playing out in different ways for the Tex-Mex chain. On one hand, it is benefitting from consumers trading down from casual dining and fast casual. On the other hand, it is losing some lower-income guests to quick-service competitors running more aggressive deals.
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Williams joined the company earlier this year and quickly laid out a five-point plan to drive sales, decrease costs, and spark new unit growth. It starts with sharpening the brand’s positioning around what it sees as a key differentiator: better-for-you and affordable Tex-Mex fare. On that front, the chain recently reintroduced several fire-grilled burritos, priced at $9.99 or $8.99 for rewards members.
“As value perceptions across our entire industry are at a crucial point right now, our burritos with delicious ingredients like our new creamy chipotle sauce or our signature queso blanco reinforce the promise that you can fill up on really good food for a good price at El Pollo Loco,” Williams said. “The best part is that these burritos were designed to maintain our favorable margins.”
Going forward, the chain is exploring additional value options, including à la carte and combo items priced between $3 and $7.
Other elements of the five-point plan include fostering a “hospitality mindset” and becoming a digital-first business. To that end, El Pollo Loco recently slowed down the pace of installations for in-store kiosks.
“When we first began the rollout of kiosks late last year, our timeline was accelerated to help offset the minimum wage increases that were forecasted in our California markets,” Williams said. “When we stepped back and realized the high-touch training and customer service that was needed to drive sustainable customer adoption, we decided to better pace and sequence this timeline to ensure our guest experience remained a priority.”
She said the company also has been exploring additional labor productivity initiatives throughout its profit and loss statement to offset any gap from kiosk savings. It now expects to complete its company kiosk rollout by the end of the year. The extra time also has enabled some technology enhancements, like accepting gift cards and discounts.
CFO Ira Fils said the kiosks were effective in helping stores in California manage the minimum wage hike. And while the state experienced “a little more traffic decline” than other markets, the 4.5 percent comp was “pretty representative of the system.”
Another part of El Pollo Loco’s five-point plan is delivering winning unit economics. On that front, Williams said the company is looking across the P&L, from labor productivity and COGS to repair, maintenance, utilities, and all other controllable expenses to reduce costs. It has a dedicated team focused on those initiatives, led by recent new hires guiding its supply chain, operational services, and culinary functions.
“We are approaching our cost savings initiatives methodically to ensure our high-quality food and the guest experience only improve,” she said. “As we unlock this potential, we expect to start seeing the benefits in the fourth quarter of 2024 and offsetting the investments we are making in this initiative.”
With the work it’s already done and its roadmap for next year, she believes there is an opportunity to approach 18 percent restaurant contribution margin in 2025.
Additionally, El Pollo Loco is incorporating a modernized brand image at its stores with a remodeling program that has shown strong returns and improved sales. It completed two company-operated restaurant remodels and 17 franchise restaurant remodels in Q2, bringing its total completed remodels for the year to five company restaurants and 28 franchise restaurants.
The final part of the company’s five-point plan is accelerating new unit growth. To that end, it is working on value engineering a new prototype with the goal of reducing buildout costs to around $1.8 million, down from the current price tag of approximately $2.2 million, which Williams said is “simply too high to drive consistent long-term franchise growth.”
“The savings are coming from all over,” she said. “The first place I would point to is just reducing the size of the unit. Somehow, we got into this world where we were building the units bigger than they needed to be … and in this world where drive-thru and delivery just continues to grow, we just didn’t need that big of a dining room. So, we’ve reduced that to be about 2,200 square feet.”
The company also was “over-specing” the equipment package and building out some elements of the kitchen bigger than it needed to, she added. That’s an area where Tim Welsh, who recently joined as chief development officer after working for an equipment provider, is helping to unlock savings.
“We were probably overdesigning the unit,” Williams said. “Some of the design features, quite frankly, weren’t modern. It was pretty easy to say, ‘Let’s step back and rethink this, and then redraw it, simplify, and then go and rebid it.’ So, we’ve seen some nice savings on the construction costs as well. It’s not one thing. It’s a list of many things that are going to get us to that $1.8 million.”
El Pollo Loco is just finishing up the design of the prototype and will begin construction on a company unit with the reduced-cost model in the next few months.
Fils said the company is reducing its development and remodel guidance for the year to incorporate design elements and cost savings from the new prototype into a greater portion of the system more quickly. It now expects to open two new company-owned restaurants and four to five new franchised restaurants in 2024. It also expects to complete a total of 10 to 12 company remodels and 35 to 45 franchise remodels.
One franchised location opened in Q2, offsetting a single closure. One company-operated store was sold to an existing franchisee, leaving the footprint unchanged at 495 units.
