Fiscal 1984 meant fast growth for much of the fast-food business. Although the crowded industry experienced its share of setbacks -- and although rapid growth, as usual, didn't always mean profitability -- a record six restaurant groups made it to the 1985 INC. 100 roster. Three of them, surprisingly, offered the same products: the margaritas, enchiladas, and burritos sold by Chi-chi's Inc., a Mexican-food chain with close to 100 company-owned-and-run restaurants and 79 franchises sprinkled throughout 35 states and four Canadian provinces.
Chi-Chi's gross revenues hit $161.7 million in fiscal 1984, a 60% increase over the previous year. Not only did the parent company make the list, but two of its major franchisees -- Consul Restaurants Corp. (#19) and Kelly-Johnston Enterprises Inc. (#69) -- earned places as well, with 6,505% and 1,610% five-year growth rates, respectively.
Shelly Frank, the 41-year-old chief executive officer of the Louisville chain, cites two major reasons for ChiChi's success. One, Mexican food is no longer an exotic regional specialty, it now appears every-where from school-lunch menus to ballpark concession stands. "It is sold more than Oriental food at this point," says Frank. "And we expect that, within the next five to eight years, Mexican food will be consumed as much [nationwide] as it has traditionally been in the Southwest." Two, the restaurants particularly appeal to baby-boomers. "We cater to the generation that has grown up on fast food," Frank explains, "but has gotten tired of standing in lines to eat paper-wrapped food in sterile environments." Chi-Chi's, he says, is tailored to "value conscious" high-school graduates and to "yuppies who eat out a lot but want to sit down and be waited on." The average per-person tab, including drinks, is $7.50.
Frank himself is a veteran of McDonald's, Burger King, and -- just prior to coming to Chi-Chi's in 1977 -- Kentucky Fried Chicken. Although his menu and ambience are different from those of the traditional fast-food outlets, his growth strategy has been similar. Like its predecessors, Chi-Chi's has adopted the strategy of clustering restaurants within the same area, opening another unit as soon as existing outlets reach capacity. The strategy is designed to provide a better return on advertising, buying, and administrative dollars, while effectively squeezing out the competition.
Despite Chi-Chi's growth, its stock sank like a stone during 1984, falling from a high of 24 3/4 in January to a low of 10 1/4 in November. Part of the trouble could be traced back to the chain's clustering strategy, which diluted per-unit sales and made shareholders nervous. A plan to counter the loss by building nearly four dozen new units backfired: The company ran into both bad weather, which stalled construction work, and unexpected delays in acquiring land and liquor licenses.
There were problems with the remaining franchisees as well. While Consul Restaurants nearly tripled its operating units to 34 last year, Kelly-Johnston Enterprises scaled back, closing 2 units and negotiating with the parent company to sell back the remaining 16. (Kelly-Johnston is also selling off many of its other restaurant operations.)
Frank estimates it will take a year for Chi-Chi's stock to rebound, pinning his hopes on recovering Kelly-Johnston's units and on opening 40 additional company-run restaurants. Chi-Chi's $90-million cash reserve and $25-million credit line, he says, will help finance the expansion. Frank also puts a lot of faith in Consul's ability to maintain its own growth; he even enticed James H. Crivits, a former colleague from Kentucky Fried Chicken, to become Consul's president.
The Mexican-food market "is still in its infancy stage," Frank insists, comparing the ground-meat-lettuce-and-cheese dishes' popularity to the birth of a national market for pizza some 20 years ago. "We're trying to mass market a Mexican-food concept, and in any national-branded business the key to success is consistency." With more Chi-Chi's under the parent's control and the rest under the watchful eye of his former associate at Consul, Frank sees consistency within reach.