Chipotle will officially throw in the napkin on its first diversification, the ShopHouse fast-casual Asian chain, when it shutters all 15 of the units on Friday, a move the company first signaled last October. The decision to pull the plug is the latest instance of an operation spying a potential opportunity in a new market, only to be surprised by the results.
Here’s a rundown of some other high-profile failed diversifications.
1. Ruby Tuesday: Lime Fresh, Wok Hay, Marlin & Rays, Nick & Jim’s, Truffles Grill
The casual-dining chain was a prime example of a brand going from one concept to a bursting portfolio once it decides to diversify. The list of prior believers is a long one, and includes such standouts as McDonald’s (it once owned Chipotle, Boston Market, Aroma and portions of Pret A Manger and Fazoli’s), Wendy’s (Tim Hortons, Pasta Pomodoro, Café Express, Baja Fresh) and Taco Bell (Hot ‘n Now, Chevy’s, and a homegrown venture called The Bell),
In Ruby’s instance, the move into the fast-casual market (with Lime Fresh) and polished casual (Marlin & Rays, Truffles Grill) came as the mother concept was being recast as a high-end experience. The moved alienated Ruby’s customer base, but, according to many investors at the time, management was too distracted by all the new ventures to draft an effective alternate strategy. A new team quickly unwound the concept collection, starting first with the higher-end brands and working its way back to Lime Fresh, which was seen as a fresher, newer Chipotle.
Ruby is back to operating a single concept, and is still contending with the fallout from the core brand’s recast.
2. Applebee’s: Rio Bravo
One of the challenges for a franchisor is sustaining expansion opportunities not just for the parent company but for the franchisees as well. What happens when the market is saturated with the core brand? A new expansion vehicle has to be found or the franchisees will either start their own secondary brand or link up with another chain. That’s why McDonald’s bought Chipotle and Wendy’s plunked down a bag of money for Baja Fresh.
In Applebee’s case, that secondary growth vehicle was going to be Rio Bravo, a Tex-Mex dinnerhouse with roots in the Southeast. Like Applebee’s, Rio Bravo had a relatively low ticket for a full-service concept. Much of the production involved assembling meals, without much emphasis on scratch prep. Even the unit economics were in the same ballpark.
The marriage proved a disaster. The concepts proved to be less similar than management had hoped, and the Tex-Mex brand had trouble drawing a customer base in new markets. The venture proved more of a distraction than a rocket for growth.
Five years after buying the brand for $66 million, Applebee’s sold it (to Chevys) in a fire-sale deal valued at about $59 million.
3. Dunkin’ Donuts: Togo’s
On paper, it looked like an ideal arranged marriage. Dunkin’ Donuts is practically a public utility in the Northeast, but it was far from a known entity elsewhere. Plus, it wanted to bolster lunchtime traffic by adding more savory choices to the menu. Togo’s had a cult following on the West Coast, but no awareness or notoriety inland. And its following was due to the perception that the concept’s signature sandwiches were fresh and several notches above most of the franchised brands on the market. Through dual branding, Dunkin’ could get instant midday cred, and Togo’s would give patrons a reason to stop by in the morning.
So Dunkin’s parent company, Pernod Ricard, added Togo’s to its restaurant group in 1997. A few Togo’s-Dunkin’s hybrids opened, but franchisees learned the two businesses were far more distinct than they were complementary. Togo’s was much more difficult to be a quick bolt-on to the doughnut brand, and vice-versa.
But there was a happy ending to the story: Togo’s proved a great match for Dunkin’s ice cream sister, Baskin-Robbins, whose roots are in Togo’s home base of California. When Dunkin’s then-parent sold Togo’s in 2007, one of the buyers was former Baskin-Robbins president Tony Gioia. Today, a number of Togo’s restaurants on the West Coast are paired with Baskin-Robbins’ treat shops.
4. Hardee’s: Roy Rogers
Seeing the two regional powerhouses come together in 1990 was like watching an office romance develop. Everyone knew it would happen; it was just a matter of when. Hardee’s had a hammerlock on the Southeast because of its breakfast biscuits and burgers. Roy Rogers had won legions of fans in the Mid-Atlantic and southern New England areas with its roast beef sandwiches, spicy chicken, baked potatoes and quirky commercials.
The opportunity came when Marriott Corp. decided to sell Roy’s in the late 1980s. Hardee’s parent, Imasco, bought the brand in 1990 for $365 million—and, by all accounts, proceeded to screw it up. Units of Roy Rogers were converted into Hardee’s stores. Biscuits were added to the menu, but Roy’s signature fried chicken was retained.
Roy Rogers’ fans didn’t want to see their brand phased out, and they wanted their high end roast beef sandwiches and Double R Burgers, not Hardee’s more mainstream, less pricey signatures.. The situation wasn’t helped by the operational challenges of simultaneously preparing burgers, biscuits and chicken, and lurching into breakfast.
Fans of the roast beef chain revolted. The backlash was so extreme that Hardee’s decided to reverse itself and transform the converted units back into Roy Rogers stores.
But the brand never recovered. Hardee’s sold the rest of its Roy’s stores for conversion into other brands, and a handful of franchisees continued to chug along, as they do today. Hardee’s itself became a diversification venture of the Carl’s Jr. burger chain.
5. Chipotle: ShopHouse
Chipotle changed fast food in the 1990s, winning a hardcore following with burritos and other Tex-Mex products consumers could readily get elsewhere, but not of the same quality and purity. Plus, each order was made fresh for them. Would the same formula—offering a simple menu built on unprocessed, fresh ingredients assembled to order—work just as well outside of the Mexican sector? The burrito chain decided to see in 2011 by opening ShopHouse Southeast Asian Kitchen, a precursor of what’s now called fast fine. This would be no steam-table operation slinging Kung Pao chicken and fried rice in a food court. ShopHouse would offer highly spiced specialties on the edge of what consumers knew about Vietnamese food, all made with fresh ingredients combined in t a way that brought to mind hole-in-the-wall independents.
“After operating in three distinct markets, and opening in a variety of trade areas, ShopHouse simply has not demonstrated the ability to support an attractive unit economic model,” Chipotle founder and CEO Steve Ells said in October.
Left unsaid was the potential distraction from the company’s core brand, which has lost a big part of its loyal patronage since several outbreaks of food-borne illnesses made headlines in late 2015.
Chipotle still has some other experiments underway, the TastyMade better-burger brand, which just opened last fall, and a fast-casual pizza riff, Pizzeria Locale. However, it hasn’t opened another Pizzeria Locale in some time. Nor has a second TastyMade materialized yet.