El Chico Restaurants, Inc. History

Address:

12200 Stemmons, Suite 100
Dallas, Texas 75234
U.S.A.

Telephone: (972) 241-5500
Fax: (972) 888-8198

Public Company
Incorporated: 1957
Employees: 3,600
Sales: $104.4 million (1996)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

Company Perspectives:

"El Chico is committed to provide uncompromising personalized service to each guest through superior operational execution, resulting in increased sales and profits."

Company History:

One of the largest Mexican dinner house chains in the United States, El Chico Restaurants, Inc. operates El Chico restaurants throughout the southwestern and southern United States. During the late 1990s, there were approximately 100 units composing the chain. In addition to the company's El Chico units, it also operated a small number of more upscale restaurants under the Cantina Laredo, Cactus, and Casa Rosa banners.

1920s Origins

The history of El Chico restaurants began when the matriarch of the family-operated restaurant empire first cooked for the public. In 1926, Adelaide Cuellar set up a tamale stand at the Kaufman County fair, unwittingly starting a family-operated business that would endure for the remainder of the century. Adelaide Cuellar's first unpretentious steps into the business of selling Mexican food to the public were followed up by her five sons--Willie, Mack, Alfred, Gilbert, and Frank--who began the transformation of the family's tamale stand into a family dynasty by opening an El Chico restaurant in Dallas and incorporating the business in 1940. From this official starting point, the Cuellar-owned and -operated business grew briskly under the stewardship of the five Cuellar brothers.

By the 1960s, the Cuellar brothers had distinguished themselves admirably, particularly Gilbert Cuellar, who had taken charge of the family enterprise. El Chico restaurants flourished during the 1960s, developing into the largest Mexican dinner house chain in the United States and becoming recognizable enough in the corporate world to successfully complete a public offering of stock in 1968. Following the initial public offering, El Chico began offering franchises. "Everybody was franchising so we thought we would too," recalled Gilbert Cuellar, as El Chico quickly attracted individuals interested in operating their own El Chico restaurants. Over the course of four years, Gilbert Cuellar granted 22 franchises, but the move into franchising proved to be an imprudent one, creating a collection of restaurant units that demonstrated poor profitability. Franchising was discontinued in 1972, ending as an entirely unsuccessful venture. "It turned out to be the worst thing we ever did," Cuellar later remarked, "because at the time we weren't equipped to maintain standards." For Cuellar and the rest of his family, however, the worst was yet to come. As lucrative as the 1960s were for El Chico, the 1970s would be equally as disastrous.

1970s Downturn and New Ownership

El Chico entered the 1970s as a pioneer in its industry niche, having tapped a passion for Tex-Mex food strong enough to support a chain of restaurants. The company's role as elder statesman in its industry, however, began to work against it during the 1970s. The Cuellar family had been involved in the restaurant business for nearly four decades. Over the years they maintained a tight grip of control over their enterprise and admitted few non-family members into the company's executive ranks. Few changes were made in the operation of the chain as a result, and the restaurants began to show their age, causing profits and sales to wilt as the El Chico concept grew stale. The affect of the anemic financial performance was sufficient to halt unit expansion entirely by the end of the decade, but before the company completely bottomed out it was acquired by a much larger suitor, thereby ending the lengthy ownership of the Cuellar family.

In 1977, Campbell Taggart, Inc. acquired El Chico, paying more than $20 million for the 79-unit chain. A billion-dollar-in-sales baked goods manufacturer, Campbell Taggart had no prior experience in the restaurant business, but its success as a baked goods manufacturer had necessitated the move into a new business area. The company had reached its enormous size by swallowing up competing baked goods companies, eventually gaining such dominance in its markets that the federal government began to take notice. Campbell Taggart held considerable sway, reaching 98 percent of all American households with its baked goods and exerting enough dominance that the Federal Trade Commission had prohibited the company from completing any more baking acquisitions in the future. Consequently, the company was on the prowl for acquisitions in other business areas, and El Chico was selected.

Campbell Taggart executives were not drawn to El Chico because of its mainstay restaurant chain. Instead, the company was primarily after the frozen and canned Mexican food business that was part of El Chico. El Chico's frozen and canned food business, which accounted for one-third of the company's revenue volume, was performing well, unlike the company's restaurants, and represented a complementary addition to Campbell Taggart's pervasive presence in grocery stores and supermarkets. Campbell Taggart's plans for El Chico's canned and frozen food business, did not keep it from fostering interest in the El Chico restaurants. Ambitious plans were developed, plans that in five years would transform El Chico restaurants from a regional chain into a national chain, but the plans proved to be too ambitious and the already floundering restaurant business deteriorated further.

Campbell Taggart had no experience in the restaurant business before the company acquired El Chico, and after the acquisition, it made no attempt to hire anyone with the requisite expertise. Consequently, the combination of aggressive expansion and unqualified management made for a bad mix. In a 17-month span, 20 new El Chico restaurants were opened--the greatest expansion spree in El Chico's history--but the new units performed poorly. In their zeal to establish new restaurants, Campbell Taggart executives did not pay proper attention to site selection and situated new restaurants too far away from the chain's central commissary in Dallas, which made supplying the new units a costly endeavor. Further, the chain's standards loosened and customer satisfaction dropped, leading to the inevitable result of declining sales and profits. Already reeling before being acquired by Campbell Taggart, the El Chico chain was in serious trouble after three years of imprudent management. By 1980, the restaurant division was a bothersome drain on profits and desperately in need of sweeping changes.

The inexperience of Campbell Taggart management caused its most decisive blow after El Chico's financial condition turned grave. Struggling to revive profits, Campbell Taggart executives attempted to squeeze greater profits out of the chain by cutting costs, which lowered the quality of food and service throughout the chain. In reference to this period in Campbell Taggart's ownership, a Cuellar family member later remarked to Restaurant Business, "Campbell Taggart was a fine company with good intentions, but as a manufacturing giant the company's focus was on cost control and management efficiencies, which unfortunately isn't compatible with operating a chain of restaurants." Exasperated and struggling to find a solution, Campbell Taggart executives did what critics had contended the company should have done in 1977, and hired an executive with restaurant experience.

Richard Rivera, a senior executive at Steak & Ale, was hired in November 1980 to lead the charge toward profitability for the crippled El Chico chain, the first time an experienced restaurant manager had presided over the chain since Gilbert Cuellar. Rivera's mood was decidedly upbeat as he assumed control and assessed the condition of the 40-year old restaurant chain. "The concept was sound, it always had been," Rivera informed a Restaurant Business reporter. "All El Chico needed was some money put into it and some house cleaning done. The company had a long-standing reputation of being a good value, and I knew if we could just get operations back up to speed the rest would take care of itself." Rivera quickly went to work rebuilding El Chico's image, intent on recultivating customer loyalty. In the remodeling program that ensued El Chico units were refurbished at a cost of between $40,000 and $50,000 per restaurant. Manager training was stressed, employee uniforms were changed, and the menus, signage, and the El Chico logo were redesigned.

1982 Divestiture by Campbell Taggart

Gradually, the restaurant chain began to show small signs of recovery under Rivera's stewardship, but before the full effect of his changes could be realized, developments beyond Rivera's control called a halt to the progress. In November 1982--two years to the month after Rivera's arrival--Campbell Taggart agreed to be acquired by brewing giant Anheuser-Busch, a merger that marked the end of El Chico's ownership by Campbell Taggart. For the $570 million merger to occur, the El Chico restaurant division had to be sold to comply with federal and state laws prohibiting a brewing company from operating under a retail license. The frozen and canned food business and the commissary in Dallas could still remain under Campbell Taggart's control, but the restaurants had to go. Rivera, who felt El Chico's full recovery was imminent, wanted to continue his healing work after the Campbell Taggart/Anheuser-Busch merger and attempted a leveraged buyout of the El Chico restaurant chain. Rivera failed, but other interested parties were waiting in the wings. W.R. Grace made an offer for the restaurant division, followed by Pillsbury and General Mills, but these industry behemoths were outbid by a familiar figure in El Chico's history: Gilbert Cuellar.

Cuellar, 73 years old at the time, offered $12.6 million for the business his family had founded, by far exceeding the amount of all other offers, including the bids submitted by multi-million-dollar conglomerates. Rivera, who had done much in a short time to get the El Chico chain pointed in the right direction, offered his explanation: "Gilbert was in a unique position. The company had begun turning around, but on paper it still wasn't profitable. Anyone else who bid on El Chico offered quite a bit less because they weren't involved all along and really couldn't get a handle on the company's true value. Gilbert knew El Chico's potential worth, and knew he could organize a management team to keep the company on track." Cuellar made the purchase with the help of a guaranteed personal loan and resumed Cuellar family control over the enterprise, enlisting the help of his son, Gilbert Cuellar, Jr.

Father and son took charge of El Chico following Campbell Taggart's troubled five-year ownership and served together for less than four years. In July 1986, Gilbert Cuellar, Sr. died, leaving his son in control of the nearly half-century old Cuellar business. Under the combined tutelage of the Cuellars several new dining concepts were developed that would consume the company's efforts for the ensuing decade. The oldest of these new concepts was Cactus, a theme restaurant developed under Campbell Taggart's control and slated for expansion under Cuellar management. Featuring mesquite-grilled, half-pound hamburgers and finger foods in a club atmosphere, the three Cactus restaurants in Dallas, Oklahoma City, and Fort Worth depended heavily on liquor sales, generating 45 percent of total sales from alcohol compared to 16 percent generated by El Chico units. Of the three new concepts born in the 1980s, Cactus presented the only genuine opportunity for expansion during the 1980s, at least in the minds of management midway through the decade. Looking ahead, Cuellar, Jr. hoped to open three to four new Cactus units per year, each modeled after a 6,000-square-foot, 220-seat prototype. The other two concepts, Casa Rosa and Cantina Laredo, were related more closely to El Chico restaurants than Cactus. Casa Rosa, which had been opened by Cuellar, Jr. prior to his father's reacquisition of El Chico, operated as an upscale Mexican dinner house in a Dallas suburb and was more expensively appointed than El Chico units. Cantina Laredo, which debuted in late 1984, featured home-style Mexican cuisine using ingredients indigenous to the rural areas of Mexico. Its menu items were spicier than the traditional Tex-Mex fare offered by El Chico and were targeted at both Mexicans and more adventurous Americans. One Cantina Laredo was in operation in Forth Worth, with only limited expansion potential for the future.

Gilbert Cuellar, Jr. pinned considerable hope on the development of new restaurant concepts as a substantial engine for growth during his years of leadership. The El Chico chain, meanwhile, did not regain the strength lost during the 1970s. After its divestiture by Campbell Taggart, the chain was beginning to make encouraging strides but competition was fierce, one of the major differences contrasting El Chico's heyday and the 1980s. The industry niche El Chico had helped to create during the 1940s was heavily populated by the 1980s, its ranks swelled by the broad-based appeal of Tex-Mex and traditional Mexican cuisine. Profitability problems continued to hound the El Chico chain as the decade progressed, leading to a number of restaurant closings during the late 1980s. Despite the anemic performance of some units, El Chico still ranked as a formidable force in its markets, serving nearly 16 million people in an 11-state territory. By 1987, the company's long-held presence in the southwestern and southern regions of the United States was staked out by more than 100 restaurants that generated more than $100 million in revenue each year. Gilbert Cuellar, Jr., El Chico's president, chief executive officer, and chairman, occupied himself with the development of other restaurant concepts, however. His plans would manifest themselves in a grand fashion as the 1990s began.

1990s Management Shakeup

By early 1991, the number of El Chico restaurants had been whittled to 89, but the biggest news of the year was not the declining number of El Chico units. Instead, the focus was on the other concepts under development by El Chico Corp., the composition of which had been in flux since the mid-1980s. Two of the concepts had endured from the early 1980s, Casa Rosa and Cantina Laredo, and had been joined by Cuellar's Cafe and Lupita's, along with a new concept, scheduled for debut in mid-1991, called Texana Grill. To underscore the importance of these new dining concepts, the company targeted its Cantina Laredo formula as the growth vehicle for the company's future, a designation that for decades had only applied to the El Chico chain, and then management made a startling change. In early 1991, El Chico Corp. changed its name to Southwest Cafes Inc., further committing itself to the strategy embraced by Gilbert Cuellar, Jr. of emphasizing more upscale, higher-ticket dining concepts. Paul Vinyard, a company senior executive, explained the name change, providing a clear idea of where the Cuellar enterprise was headed in the future. "We did it to reflect that the company is different from what people perceive it to be. We're a lot more than El Chico now."

Slightly more than a year after the name change, Southwest Cafes' board of directors convened and resolved to fire Gilbert Cuellar, Jr. as chief executive officer. Cuellar's strategy, which had been in effect since the mid-1980s, had shaped the company into a different type of restaurant competitor, a type the board of directors had decided not to become. Instead, the board of directors voted to refocus resources and attention on the company's largest dining concept, the El Chico chain, and deemphasize the company's forays into new, more upscale dining concepts. Referring to Gilbert Cuellar, Jr.'s removal, one industry analyst offered his opinion, "My impression is that Cuellar liked looking for other concepts. The obvious conclusion is that it cost him his job."

In the wake of Gilbert Cuellar, Jr.'s dismissal, the search was on for a replacement, as the company once again canvassed for a leader to invigorate the El Chico chain. Several weeks after the power struggle that ended with Cuellar's removal, J. Michael Jenkins was hired as chief executive officer and chairman by the board of directors. Jenkins, who himself had recently been ousted as chief executive officer of Metromedia Steakhouses Inc., confidently declared on his arrival, "My career is about turnaround and growth," and proceeded to demonstrate the validity of his boast.

When he joined the recently rechristened El Chico Restaurants Inc., Jenkins inherited 84 El Chico restaurants. Jenkins added to this total steadily, as he tinkered with designs for the El Chico restaurant of the future. One year after his arrival, Jenkins came out with a smaller restaurant prototype located in Tyler, Texas, that measured 4,900 square feet, compared to 5,700 square feet for the average El Chico unit, but seated the same number of patrons (roughly 190). After the Tyler restaurant opened another similarly sized unit was under construction in Jackson, Tennessee, with agreements or letters of intent for five other sites in Texas, Tennessee, and Oklahoma.

Jenkins and his management team did not settle on the Tyler prototype as the model for expansion, however. Company executives continued to alter designs and layouts. In 1996, at which time the El Chico chain once again had been built up to 100 units, management believed it had found the answer with a new prototype in Richardson, Texas. The new version was slightly larger than the 1993 prototype, measuring roughly 5,500 square feet, and featured a larger central bar area that offered full-service. The exterior was different from older units as well, sporting a cantina-style facade rimmed in neon. Further changes were found on the menu, which included several new fat-free selections such as Toblano Chicken Salad, UnLite Chicken Fajitas, and Santa Fe Chicken Burrito. With this new unit, Jenkins and his senior executives prepared to move forward with expansion, hoping to bolster sales and profits with newer restaurants as the 21st century drew near. "The newer stores have a lot more appeal," the company's chief financial officer explained, "and we think we've hit the formula that we've been searching for."

Principal Subsidiaries: Pronto Design and Supply, Inc.

El Chico Restaurants, Inc. History

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