Financing

Restaurant chains have a Texas-sized challenge

El Pollo Loco, Pollo Tropical and Del Taco all struggle in the Lone Star State.

Texas sure looks good to a lot of restaurant companies, and why not? It’s the country’s second most populous state, with a lightly regulated economy and some of the country’s fastest-growing markets. The juice chain Jamba Juice went so far as to move its headquarters into the state.

But a handful of chains looking to make their move in the state have found it not quite as friendly as they’d hoped.

For instance, El Pollo Loco recently closed three locations in the state and has impaired a total of eight locations in the market.

The chain is slowing its growth in Texas and is “implementing a comprehensive brand relaunch” in the state, CEO Stephen Sather said on the company’s third-quarter earnings call last month.

Loco’s “ongoing challenges in our Texas markets” hurt the company’s earnings in the period, Sather said.

El Pollo Loco can take some solace in the fact that the company still actually operates locations in Texas.

Pollo Tropical, owned by Texas-based Fiesta Restaurant Group, closed all of its Texas locations recently. That came just three months after Fiesta executives said they planned to keep the six remaining locations open as “kind of a beachhead.” Pollo Tropical had already closed numerous locations in the state earlier this year.

Two years ago, meanwhile, the California-based chain Del Taco closed 12 of its locations in Texas.

There were some other notable challenges among restaurants in Texas this year, such as the bankruptcy at a 29-unit Dairy Queen franchisee and the closures of at least 14 locations at Lone Star Steakhouse.

The problem isn’t the Texas economy—its unemployment rate of 3.9% is slightly lower than the U.S. unemployment rate, for instance, and the state’s restaurants quickly saw sales increases in October after Hurricane Harvey-related weakness in September.

Yet the brands moving into Texas each tried jumping markets to make it big in the state. Going from Florida to Texas, as Pollo Tropical tried to do, or from California to Texas, as El Pollo Loco and Del Taco tried to do, is not as easy as it seems.

For one thing, consumers in the new market aren’t as familiar with the brand. That was a clear problem with Pollo Tropical, which was also going into Texas with a Caribbean-inspired menu far more popular in Florida.

The Rocky Mountains, meanwhile, can be something of a barrier that makes it difficult for chains to make the move from California to Texas or even the Midwest.

To be sure, some chains have succeeded in moving to Texas—Jack in the Box has become popular there. In-N-Out has seemed to do fine there, with some saying it’s the most popular burger chain in the state, while others insist that’s not the case.

Yet Texas has its own chains and local concepts, particularly those that specialize in Latin cuisine. Consumers might be reluctant to try a new chain they hadn’t heard of when they have a local place they like, anyway.

But that’s the challenge in jumping markets. Unless a restaurant chain starts off with a well-known name, it’s better off expanding in contiguous markets where name recognition is less of a problem. That’s true regardless of where a chain is trying to move.

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