Edit
OPINIONFinancing

Why Pollo Tropical suddenly struggled

The chain’s move into Texas proved to be a disaster, and it has since pulled back to its Florida roots, says RB’s The Bottom Line.
Photograph: Shutterstock

the-bottom-line

For a time, I thought Fiesta Restaurant Group was the most underrated growth story among restaurants on Wall Street.

The company operates Pollo Tropical, after all, and in 2014 few chains performed nearly as well. It had years of same-store sales growth, unit volumes of more than $2.7 million off just two dayparts, and store-level margins second among public chains only to Chipotle at the time. Surely it would work outside of its core Florida market.

It didn’t.

As my colleague Heather Lalley wrote, Pollo Tropical closed 14 units in Florida and Georgia, including all nine in the Atlanta market. In addition, sister chain Taco Cabana closed nine locations.

At its peak just more than two years ago, Pollo Tropical operated 209 locations. The latest round of closures would give the chain 166—136 company units plus 30 franchisees. That’s a 20% decline over two years, a rather stunning turn of events given how profitable that chain was.

Pollo Tropical is a Caribbean-centric fast-casual chain first started in Miami in 1988. Prominent Burger King franchisee Carrols Restaurant Group owned the brand and Taco Cabana in 2012 when it spun them off as Fiesta.

And for a while, Fiesta bloomed. Between that split in 2012 and the spring of 2015, the company’s stock more than quintupled.

Fiesta had the numbers to back it up. Between the third quarter of 2010 and the third quarter of 2015 Pollo Tropical’s quarterly same-store sales averaged 7.4%. That was a remarkable run.

Pollo Tropical was largely a Florida chain. But in 2014, Fiesta announced plans to open the brand in Texas. It was an interesting test. Fiesta is headquartered in Addison, Texas, and Taco Cabana is a Texas chain.

That strategy backfired. Those consistent same-store sales of Pollo Tropical’s suddenly evaporated. Same-store sales averaged a 3.5% decline between the fourth quarter of 2015 and the fourth quarter of last year.

That includes a 10.9% decline in the third quarter of 2017 that coincided with a pair of hurricanes.

Still, the brand’s move into Texas failed. Consumers in a market known for its Mexican concepts and barbecue restaurants didn’t quite take to its citrus-marinated, fire-grilled chicken.

Last year, less than three years after announcing its move into Texas, Pollo Tropical began closing units there. It closed all of the locations in the state that year as part of a larger closure of some of the chain’s weakest units.

But the chain’s closures now appear to be getting closer to its core markets. The 14 locations being closed now are in Georgia and Florida.

Fiesta’s stock, meanwhile, lost 75% of the value it had at its peak in the spring of 2015—losing nearly all that it gained following that 2012 split.  

Pollo Tropical’s unit volumes remain relatively strong, but at more than $2.3 million they remain far off its peak in 2014. And restaurant level margins that once exceeded 25% were 17.6% last year.

It’s likely that the company’s aggressive growth proved too much for the chain and in particular its regional menu. Pollo Tropical added 53 company units in 2015 and 2016, 43% growth in the number of company-run locations. Essentially, closures over the past two years wiped out most of that growth.

It’s basically a correction.

Perhaps now the chain can focus on its core units in its core market, where its menu is known and loved best. But the world beyond Florida was apparently not ready for a Caribbean concept.

Trending

More from our partners