WHY BAJA FRESH NEVER BECAME CHIPOTLE CONTINUED...
FINANCE
Chipotle’s unit volumes and unit sales have grown annually. Today, a typical restaurant generates $3 million a year. The brand has 3,400 locations in the U.S. and is working to develop its presence internation- ally. Baja Fresh was sold in 2016, along with a sister company called La Salsa Fresh Mexican Grill, to the Canadian brand collector MTY Food Group for $27 million. But it remains a shell of itself. Dollarhyde had an opportunity to buy the chain when Wendy’s put it up for sale in 2006. He was tempt- ed. But he didn’t do it. “I finally de- cided it was like going back to an old girlfriend,” he said. “I don’t need to do this right now in my life.” The lack of investment from Wendy’s following the deal was clearly frustrating to Dollarhyde, but he also acknowledges that he wouldn’t want to run Baja Fresh un- til it had 2,000 locations, anyway. It's also a reminder these days, particularly as Jersey Mike's cus- tomers express frustration over its sale to the private-equity firm Black- stone, that any buyer of a restaurant chain can easily mess up a good thing with one or two bad decisions. No matter who they are.
The lack of marketing support was also problematic, particularly as Chipotle began a billboard cam- paign around the country. “You’ve got this educated cus- tomer not getting the food they’re used to,” Dollarhyde said. “You’re not getting the marketing. It’s the competition. The franchisees don’t have a strong hand.” While private-equity firms are often criticized, fairly in most cas- es, for some of the steps they take in buying a brand, the same should also be said for large brands that buy up growth chains. The smaller chain often needs more financial support than it seems. They also need to act quickly, which can be a problem at a large company. But sometimes the big company just changes the growth brand’s cul- ture to a fault and the growth brand struggles as a result. As such, these acquisitions frequently fail. Or at least it takes time for the growth brand to adjust to the culture shock. The publicly-traded big company loses patience and then sells the brand. “A big company comes in that doesn’t really feed the culture, doesn’t hire someone who feeds the culture, understands the culture, and then starts eroding the product culture, and there you go,” Dollar- hyde said. In January 2006, Chipotle went public. The buildup for the initial public offering was so strong the company raised its price twice. When it started selling shares, the stock doubled on the first day of trading. By the following October, McDonald’s divested itself of the company. That same month, Wendy’s sold Baja Fresh for $31 million to a group of investors, led by David Kim, a franchisee of several different brands. McDonald’s made more than $1 billion on its investment in Chipot- le. Wendy’s lost nearly $250 million.
THE STORY SINCE There’s no guarantee that Baja Fresh would have thrived under different circumstances, perhaps if it went public or if Wendy’s had invested behind the brand and its marketing in those early days. It’s entirely possible that Wendy’s just had bad timing. Maybe they didn’t do enough due diligence on the brand and its competitive set. Whatever the reason, within two years of Wendy’s buying Baja Fresh, its average unit volumes fell some $300,000, tumbling below those of Chipotle. The company’s new owners fo- cused largely on refranchising cor- porate stores, selling most of them to franchisees. But the growth days were over. The chain’s unit count peaked at 299 restaurants in 2005, according to Technomic. They’ve been in de- cline since. The chain operates just 78 restaurants today. Unit volumes have also fallen. Today, the average Baja Fresh gen- erates just $800,000 per year, only about 60% of the unit volumes it had when it was sold to Wendy’s. Aside from a couple of years in- terrupted by an E. coli outbreak,
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RESTAURANT BUSINESS JANUARY 2025
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