Chi-Chi's Inc. History

Address:

10200 Linn Station Road
Louisville, Kentucky 40223
U.S.A.

Telephone: (502) 426-3900
Fax: (502) 339-4204

Wholly Owned Subsidiary of Prandium Inc.
Incorporated: 1975
Employees: 8,900
Sales: $205.8 million (2000)
NAIC: 722110 Full-Service Restaurants

Company Perspectives:

At Chi-Chi's, Salsafication is more than a word. It's an attitude. It's a spirit. It's a way of life. Salsafication to us is ensuring that our guests are greeted with a smile and that they leave with one. During the Salsafication experience, our guests will enjoy fast friendly service and delicious food and drink served in a fun, festive atmosphere. It's what we're all about.

Key Dates:

1975:: Marno McDermott establishes Chi-Chi's Mexican Restaurante.
1976:: First year sales skyrocket to $2 million.
1986:: Hal Smith is hired as CEO and begins to restructure operations.
1988:: Chi-Chi's is acquired by Foodmaker Inc.
1994:: The company is purchased by Family Restaurants Inc.
1999:: Chi-Chi's parent company renames itself Prandium Inc.
2002:: The company continues with organizational restructuring as Prandium files for Chapter 11 bankruptcy.

Company History:

Chi-Chi's Inc., owned by Prandium Inc., is a chain of 130 Mexican full-service restaurants that can be found in Illinois, Indiana, Maryland, Michigan, Ohio, Pennsylvania, Virginia, and Wisconsin. In addition to company-owned stores, there is also a handful of Chi-Chi's franchise locations. After a booming start in the late 1970s and a growth spurt in the early 1980s, Chi-Chi's sales and store count declined. In the late 1990s and into 2000, the company embarked on a new marketing campaign designed to revitalize the Chi-Chi's image. While the firm remains a well-known player on the Mexican restaurant scene, it continues to face staunch competition in the industry.

Origins

Established in 1975 by Mexican restaurant magnate Marno McDermott and investor Max McGee, Chi-Chi's specialty was Sonoran-style Mexican food. McDermott, a long-time fan of Mexican food, had previously created a fast food concept entitled Zapata Foods after graduating from the University of Minnesota. Believing that there was indeed a demand for a full-service Mexican restaurant in the Midwest, McDermott sought out the help of McGee, a former professional football player who owned the Left Guard Bar/Restaurant in Minneapolis, Minnesota. Together, the pair opened Chi-Chi's Mexican Restaurante in a section of the downtown bar. Chi-Chi's, which took its name from the nickname of McDermott's wife, was an instant success. First year sales surpassed the planned $400,000, climbing to $2 million.

McDermott's good fortune caught the eye of John Stephens, a Minnesota-based stockbroker. Stephens convinced McDermott to sell him the rights to operate and franchise Chi-Chi's restaurants. Shelly Frank, the vice-president of concept development at the Kentucky Fried Chicken fast food chain, was then called upon to run the new restaurant business. In 1977, Frank was named president and CEO, and company headquarters were moved to Louisville, Kentucky--Frank's hometown.

Starting in the early 1980s, Frank drove rapid expansion of company-owned stores. Spurred on by stores which frequently opened to sales of $70,000 or $80,000 a week, Chi-Chi's spread throughout the Midwest, where they had virtually no competition. From 1981 to 1983, company-owned restaurants soared from one to 46, and profits multiplied eleven-fold from the beginning of the decade to $9.1 million in 1983. In 1985 alone, 42 new Chi-Chi's opened, with 27 company-owned and 15 franchised. This increased total units by more than one-third, and company-owned units by 50 percent. In 1984, Chi-Chi's net income peaked at 16.7 million. By 1986, Chi-Chi's operated 200 restaurants.

Problems Arise: Mid- to Late 1980s

From 1984 to 1987, however, the chain's profitability began to slide. This coincided with an overall decline in the industry due to lowered alcohol consumption, saturated restaurant markets, maturing baby boomers, and the growing popularity of at-home food and entertainment options. Chi-Chi's was also showing weakness created by the stress of rapid expansion.

During its growth spurt, the chain had built 10,000 to 12,000 square foot restaurants, which were too large to operate profitably as the economy flattened out in the mid-1980s. In addition, Chi-Chi's had clustered restaurants in order to seize high market share in a given area, cutting average sales for individual units. There were also several failed attempts to penetrate new markets: nine company-owned units choked in New York City, as did three in New England. Franchises in Atlanta, Texas, New Mexico, and San Diego also failed to take root.

While Chi-Chi's had grown, it had neglected to create an effective corporate communication network. The corporate management was not in touch with the needs of field managers and franchisees, so that team spirit and confidence in the company was ebbing low. Franchisees were feeling uneasy, particularly after the Chapter 11 bankruptcy of Chi-Chi's Food Services Inc., an Oklahoma City-based franchise that was a subsidiary of Kelly Johnston Enterprises. But even in company-owned stores, management turnover had reached as high as 80 percent. Inconsistency in management translated to the customer as unreliable service and food. After their peak year in 1984, sales began to decline, and by 1986 total revenues had dropped from $269.3 million to $206 million, while net income bottomed at $9.1 million from $15.6 million.

When Shelly Frank retired in 1986, Hal Smith came on board as Chi-Chi's new leader, leaving his position as president and CEO of the Chili's restaurant chain. Smith identified three major problems in the company: declining store sales, poor unit profitability, and high management turnover. His recovery strategy focused on opening the lines of corporate communication and streamlining the bureaucracy. Smith gained the support of the corporate officers, all of whom had been hired by Frank, by having a face-to-face meeting with every middle and upper-level manager in order to get the lay of the land. He reduced corporate staff by 18 percent and redefined certain jobs.

Chi-Chi's held its first management conference in September 1987, bringing together over 200 general managers, area supervisors, regional directors, and executives to galvanize the team. Further, Smith encouraged direct communication between field managers and the home offices in Louisville. Franchisees were pleased to find Smith, who would personally return phone calls, far more accessible than his predecessor.

A former franchise owner was brought on as vice-president of franchise relations in 1987, and the independent operators were encouraged to develop and share ideas with the company. Consul Corp., which operated 40 restaurants, had pioneered the idea of the El Pronto walk-up units, which featured selections from the full Chi-Chi's menu. The company tested two small El-Prontos in Midwest malls. In turn, the company helped smaller franchisees cover the $45,000 costs of refurbishing units and stepped up communications and visits.

In company-owned stores, Smith cut paper work for store managers so that they could turn their attention to the customers. Managers' schedules, which had frequently ballooned to 80 hours and six days a week, were cut back to 50 to 55 hours a week with two consecutive days off. Managers' salaries were also made more competitive. New bonus plans, health and life insurance plans, and a stock ownership program were instituted. Training was improved for managers, and employees and servers were encouraged to show their personality within the parameters of quality service. Inside of a year, management turnover was reduced to 35 percent.

Within two years, Smith had created a team of employees--from executives to managers and wait staff--that felt committed to working at Chi-Chi's. Financial benefits began to appear early in 1987, when same-store average volumes were up slightly for the first time in more than a year, and the second time in four years. Instead of expansion, Chi-Chi's had disposed of 21 marginal stores by April of 1988, taking a $20 million write-off against earnings. The chain planned to build only eight to ten new restaurants in fiscal 1988, down from the previous rate of 20 to 30 a year. Only five new stores were franchised.

Chi-Chi's also opened three new conceptual restaurants in the winter of 1987-88: Papanda's Border Café, Chajita's Mexican Café, and G.W. Sharkey's. Papanda's was a Mexican restaurant aimed at the southeastern and south central United States, where Chi-Chi's had previously failed; Chajita's was a fast food restaurant with touches of dining house atmosphere; and G.W. Sharkey's Oyster Bar and Grill was a fresh seafood restaurant. All three restaurants featured display mesquite grilling, informality, and a good price/value ratio.

Foodmaker Acquires Chi-Chi's: 1988

By 1988, all the refurbishment attracted an unwanted take-over bid from the Carlyle Group, a limited partnership that had recently become Chi-Chi's largest stockholder with 7.5 percent outstanding shares. Chi-Chi's commissioned First Boston Corp. to locate an investor to outbid Carlyle's offer of $200 million. Carlyle removed its bid in February of 1988, but in April the company was purchased by San Diego-based Foodmaker, Inc., the owner of Jack in the Box restaurants, then the country's fifth largest fast food chain. It purchased the 129 company-operated Chi-Chi's (there were also 77 franchises) for about $235 million in April of 1988. Chi-Chi's retained its own corporate staff while Hal Smith continued to head the company as a division of Foodmaker.

The chain did well for a period, hitting its best year in 1990 with sales of $450 million; things held steady in fiscal 1991, with pretax profits of $57.3 million on about the same amount of sales. Despite continued good management, the tight economy began taking a toll on the chain once again. In 1992, Chi-Chi's was still second in its segment, but sales had dropped to $445 million and guest counts were on the decline yet again throughout the 160 company-owned and 65 franchised restaurants. Segment leader Taco Bell threatened Chi-Chi's with its cheap eats and 4,000 outlets racking up sales of $3.3 billion. The competition proliferated as McDonald's restaurants offered a breakfast burrito, and restaurants of every stripe added Mexican food to their menus. In addition, non-Mexican restaurants were outstripping Chi-Chi's at the low-cost, fun atmosphere game. Dinner house chains like the Olive Garden, Cookers, and Macaroni Grills were stealing customers from Chi-Chi's with their appealing image of fresh food and hospitality.

To combat the slump in sales, Chi-Chi's introduced value-priced entrees at $3.99 and $4.99 and freshly prepared rice, beans, and beef. Smith felt that customers were not aware of the amount of "scratch" cooking that went on in Chi-Chi's kitchens, and the chain began emphasizing the fresh food in their advertising. Tortilla making machines were brought into the lobbies of company-owned stores to give customers an immediate message of freshness.

The restaurant's original menu of Sonoran cuisine was all but replaced by Tex-Mex and grilled items. The menu thrust was to take popular American foods and "mexicanize" them; the chain was experimenting with items such as Mexican pasta with blue-corn fettucine, Mexican pizza as an entree, and Mexican stir fry.

In June 1992, Smith quit Chi-Chi's unexpectedly, citing personal reasons. A year earlier, Mike Fiori, Smith's vice-president, had left the chain. Thus, with Smith's departure, only two senior executives remained who had extensive Chi-Chi's experience. Kenneth R. Williams, executive vice-president of Jack in the Box, was named to replace Smith.

In the summer of 1992, Chi-Chi's and its parent, Foodmaker, took over Consul Restaurant Corp., a major franchisee operating in Chapter 11 bankruptcy. Although Consul aligned with a group of unsecured creditors to counter the takeover bid, Chi-Chi's was able to purchase the publicly traded Consul's assets for $8.7 million in cash, taking over its operations and debt.

Consul was burdened with $17 million in debt, most of which stemmed from the company's failed expansion into Texas and the western markets in the mid-1980s, when fourteen units went under. Chi-Chi's kept 22 of the 26 Chi-Chi's units Consul operated, liquidating the remaining assets in order to pay Consul's creditors at 80 cents on the dollar. The Consul units, located in Minnesota, Wisconsin, Nebraska, and North and South Dakota were refurbished and upgraded, and new menu items were introduced, along with new uniforms, table wear, and Tortilla machines. Most of the field employees were retained, although CEO William D. Etter and chief financial officer Bob Lamp were replaced. Williams was tapped to be senior vice-president of Foodmaker just six months after taking the presidency of Chi-Chi's and was succeeded by long-time Chi-Chi's employee Joe Micatrotto.

In 1993, the chain continued to see same-store sales slip. Store makeovers that ran to $200,000 per unit and featured a festive color scheme with banners, striped neon lighting, new tiling and wood, a sun room and a display cart featuring an array of fresh fruit were continued. Spinach quesadillas were introduced, while advertising featured "Fiesta for Two," a complete dinner package for $14.99.

Family Restaurants Takes Control: 1994

Early in 1994, Chi-Chi's was acquired by Family Restaurants Inc. Family Restaurants was formed after the Chapter 11 bankruptcy reorganization of Restaurant Enterprises Group, which already owned Chi-Chi's top competitor El Torito. The chains were brought together under one parent, newly named Family Restaurants. Although each retained its individual name and style, the marriage created the first coast-to-coast chain of full-service Mexican restaurants, comprising 315 units, including some Casa Gallardo establishments as well as other divisions. The merger also made Family Restaurants one of the five or six largest operators of full-service restaurants, with a total of 680 units in all.

Foodmaker exchanged the 237-unit chain for a 40 percent stake in the new venture and approximately $200 million in cash. They shared ownership of Family Restaurants with Apollo Advisers L.P., and Green Equity Investors L.P. Micatrotto was brought in to lead the restructured Family Restaurants. Barry Krantz assumed leadership of Family's Mexican division in February of 1995. By the mid-1990s, Chi-Chi's was strengthened by its merger with El Torito, but the chain continued to face the stiff competition that characterized the food service business in the early 1990s.

In fact, Chi-Chi's remained plagued by problems related to both image and competition throughout the remaining years of the 1990s and into the new century. By 1996, sales had fallen off to $278 million. Even as the firm continued to revamp its menu and advertising, it came under fire for its high-fat menu by the consumer advocacy group Center for the Science in the Public Interest. In dire need of drastic changes, Chi-Chi's hired a new advertising company and adopted the slogan, "Life Always Needs a Little Salsa." Its menu was updated with fresher, healthier selections while old favorites were given new plate presentations. Stores were also remodeled to compete with the new modern looks of chains such as Don Pablo's, whose restaurants had open floor plans with high ceilings, water fountains, and plants.

Chi-Chi's also attempted to stay ahead of competition by offering a line of takeout products that could be ordered online through the Chi-Chi's Web site and then picked up at a local restaurant. In 1999, the firm unveiled its "Get Salsafied" advertising campaign, which was followed by traveling Volkswagen Beetles that were adorned with Chi-Chi's advertising and sombreros. The "Bug Tour" was initially launched in 1999 in Philadelphia and New Jersey and moved into its major market areas during 2001 when the restaurants began touting their "Sizzlin New Menu."

Despite the company's efforts, sales dropped from $227.7 million in 1999 to $205.8 million in 2001. Store count also fell from 150 company-owned and 15 franchised locations in 1999 to 137 company-owned and seven franchises in 2001. In order to better position itself for future growth, Chi-Chi's parent company, Prandium Inc.--the new name was adopted in 1999--began a restructuring program in 2001 at its headquarters in California and at Chi-Chi's headquarters in Louisville. Kevin S. Relyea took over as chairman, president, and CEO of Prandium and also remained at the helm at Chi-Chi's. Overburdened by debt, Prandium declared Chapter 11 bankruptcy in May 2002. Its reorganization plan was approved by the U.S. Bankruptcy Court in July of that year.

While Chi-Chi's had yet to regain the momentum of its early years, the company forged ahead with its advertising and remodeling efforts. With nearly 20 million customers under its belt, management felt certain its reorganization would pay off. Whether or not Chi-Chi's would be able to combat its harsh competition in the years to come, however, remained to be seen.

Principal Competitors: Applebee's International Inc.; El Chico Restaurants Inc.; Mexican Restaurants Inc.; Avado Brands Inc.

Chi-Chi's Inc. History

Company Perspectives:

Key Dates:

Company History:

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