Operations

El Pollo Loco expects double-digit wage inflation

The California fast-food wage coming next month will force the chain to increase prices, but also look for ways to cut costs across operations.
el pollo loco
El Pollo Loco ended fiscal 2023 with 495 units, including 323 franchised locations. | Photo: Shutterstock.

El Pollo Loco expects wage inflation to be between 12% and 14% this year as a result of the California fast-food wage increase coming next month.

Roughly three quarters of El Pollo Loco’s 495 units are in California, where the state minimum wage for fast food workers will jump to $20 per hour in April, up from the current $16 per hour. The company plans to increase pricing in the mid- to high-single-digit range in fiscal 2024, but interim CEO Maria Hollandsworth said pricing will not be enough to offset the impact.

The Costa Mesa, Calif.-based grilled chicken chain is also looking across operations for ways to cut costs, like reducing the salsa offerings and bringing in new equipment to simplify the salsa-making process.

During the Dec. 27-ended fourth quarter, menu prices were up 6% year over year, but same-store sales at company-operated units declined  0.2%, which was blamed on a 0.4% decrease in average check offset by a 0.2% increase in transactions. Systemwide, however, same-store sales increased 0.9%.

The chain brought back Double Pollo Fit Bowls in December, which were a hit, particularly with women and higher income guests, said Hollandsworth.

But consumers are “under pressure” and have been shifting behavior in a few ways for a couple of quarters now, said CFO Ira Fils.

“They’re trading down a little bit and they’re also buying less items per check,” he said. “And we’re seeing a little falloff on family meals as well.”

Sales have also shifted more to lunch, which tends to be a lower check, he added.

In the first quarter through Feb. 28, however, systemwide same-store sales were up 3.8%, including a 2.2% increase at company units and 4.7% increase at franchised restaurants, and the company expected that momentum to increase as weather improves.

The fast-casual chicken chain is picking up speed on restaurant remodels with plans to refresh 15 to 20 company restaurants and 40 to 50 franchise units in fiscal 2024. Last year, 15 company-owned and 33 franchise units were remodeled.

The chain is also working on more support for franchise development, recruiting new operators and working to reduce buildout costs to $1.8 million to get the development flywheel going, Hollandsworth said.

Next week, El Pollo Loco’s new CEO Liz Williams is set to take the helm and Hollandsworth said she is “passionate about development.”

Williams most recently was CEO of Outfox Hospitality and helped launch the plant-based concept Hart House, but she is known for her 10 years with Yum Brands, serving as CFO and president of Taco Bell International.

This year, however, the chain expects to add two new company-owned restaurants and five to seven new franchised units.

Net income was $4.4 million for the quarter, down from $6.5 million a year ago. Systemwide revenues declined 3.2% to $112.2 million.

Last year, 80 company-owned units were refranchised to existing franchisees.

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