WHY BAJA FRESH NEVER BECAME CHIPOTLE CONTINUED...
FINANCE
Unit count for the fast-casual Mexican chain peaked at 299 in 2005. But the company has been closing locations every year since then. BAJA FRESH RESTAURANT COUNT
Chipotle had more locations than Baja Fresh that year (232 v. 210). But Baja Fresh won out on ev- ery other data point. The chain had stronger average unit volumes ($1.5 million v. $1.1 million) and more to- tal U.S. sales. Yet in 2002, the big three burger chains were engaged in an apparent game of one-upmanship. In the late 1990s, McDonald’s had been investing into ancillary concepts and put money into sev- eral of them, including Fazoli’s, Boston Market (mostly for the real estate) and Donato’s Pizza. And it turned to the burgeoning fast-casu- al Mexican sector with a $50 million investment in Chipotle. And Chipo- tle was clearly becoming a success. Some of McDonald’s rivals want- ed a piece of that business. And so as Baja Fresh filed its IPO documents, it also got a call from Wendy’s. The burger chain already owned Tim Hortons, which it had acquired in the 1990s. It was clearly inter- ested in growth chains—later in the year it would make a minority investment in another fast-casual chain, the Italian concept Pasta Po- modoro. But it wanted all of Baja Fresh. “In no time, the senior leader- ship of Wendy’s was in their jet and out to Baja Fresh,” Dollarhyde said. “I put together this big, two-hour presentation on the company and the financials. And when they got in and sat down, I gave a brief intro- duction, and then they proceeded to tell me how great Wendy’s was, how great Wendy’s was to work for, and how Wendy’s was going to do so much for Baja Fresh. “They barely got to the book that I put together.” Executives continued to sell him on the deal afterward. “That was the weirdest meeting I’ve ever been in,” Dollarhyde said. “I mean, if someone’s going to buy you, usu- ally the diligence is deep, and they
bring a proctologist with them. And so that was weird.” Wendy’s only wanted to pay cash for Baja Fresh, which provided the chain’s management team and its investors with an exit at a strong val- uation. It would take some time be- fore those investors would be able to match Wendy’s offer by going the IPO route, so the company took the offer. “We closed very quickly,” Dol- larhyde said. “Pretty soon, I was in New York on national TV with Jack (Schuessler, Wendy’s CEO) and it was beautiful. Wendy’s was ex- plaining how great it was going to be.” The next year, Jack in the Box acquired Qdoba Mexican Grill. And so three of the four largest fast-food burger chains were about to do bat- tle on a completely different front: Mexican fast-casual chains. The sale included $5 million Dol- larhyde could use to give to Baja Fresh employees as bonuses. “What a happy state of my life, giving out $5 million to the team at Baja,” he said.
IMMEDIATE PROBLEMS It wouldn’t take long before prob- lems emerged. Same-store sales started to slump late in 2022. They fell slightly in the fourth quarter of 2002, but worsened from there, including a decline of 6.8% in the second quarter. Dollarhyde said he expected some decline as some high-frequency guests backed off. But he felt he could get them back. That also brings us back to the ICSC conference. Chipotle under McDonald’s was focused on real estate. While McDonald’s is known primarily as a franchisor, or a burger chain depending on your perspec- tive, it is foremost a real estate com- pany, and it has honed those skills admirably over several decades. And now it was showing Chipotle the ropes, while investing money into the chain. McDonald’s at one point owned 90% of Chipotle and had pumped around $340 million into the chain during its ownership. The invest- ment enabled the burrito chain to develop the processes for expan- sion, largely through company
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RESTAURANT BUSINESS JANUARY 2025
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