What’s the Secret Recipe Behind This Fast Casual Restaurant’s Success?

Source: Fiesta Restaurant Group

Fiesta Restaurant Group (FRGI) has been the star among fast-casual chain operators, with its Pollo Tropical and Taco Cabana brands boasting the highest average annual sales per restaurant among its peers, based on internal estimates. Offering high quality tropical- and Caribbean-inspired food, Pollo Tropical's average annual sales per restaurant of $2.7 million is significantly higher than that of $2.2 million for Chipotle Mexican Grill (CMG 0.53%).

In the case of Taco Cabana, Fiesta Restaurant's casual, convenient restaurant chain serving Mexican flavors at affordable prices, its average annual sales per restaurant is $1.8 million. This beats the $1.2 million achieved by Noodles & Company (NDLS 9.24%), another noodles and pasta fast-casual restaurant chain employing a value-pricing strategy.

What's the magic formula behind Fiesta Restaurant's superior restaurant operating metrics relative to its peers? And does it still have room for growth?

Value proposition
Chipotle Mexican Grill has been one of the fastest growing restaurant operator in the fast-casual segment, having grown its unit count by more than 1,000% to almost 1,600 restaurants in 2013. Its focus on responsible sourcing and specialty Mexican cuisine of burritos bowls and tacos have been critical to its success.

Besides having the honor of being the first domestic restaurant group to voluntarily disclose which of its ingredients contain genetically modified organisms, it has also placed a greater emphasis on locally sourced food supplies. Last year, Chipotle raised its sourcing of domestically grown produce by more than a fifth relative to 2012.

However, Fiesta Restaurant's two fast-casual brands offer a compelling value proposition that draws customer traffic. For example, for a similar entrée such as the Chicken Bowl, Pollo Tropical charges $4.19, compared with $6.25 for Chipotle. It's noteworthy that Pollo Tropical's average customer check is on par with Chipotle at $10.This suggests that lower pricing on individual dishes could lead to an increase in overall customer spending.

Similarly, Taco Cabana offers similar menu items as Chipotle at significantly lower prices. Taco Cabana's steak taco costs $4.69, while Chipotle puts a $6.65 price tag on the same item. When it comes to another item, the Chicken Burrito, Chipotle charges customers $6.25, higher than Taco Cabana's price tag of $4.99.

Although Chipotle has the ability to charge higher prices because of its premium positioning derived from food integrity and fresh ingredients, it registered lower average annual sales per restaurant than Fiesta Restaurant's Pollo Tropical because budget-conscious consumers are drawn to its value-for-money offerings.

Food quality and customer needs
For consumers, just being cheap isn't good enough. Diners have a set of minimum expectations when it comes to food quality and other needs.

Although Noodles & Company's average customer check of $8 is comparable to that of Fiesta Restaurant's Taco Cabana, it doesn't compromise on food quality.  It still uses traditional food preparation methods like hand-chopping, parboiling, and sautéing. Noodles & Company also provides a variety of healthy menu options tailored to the needs of its customers such as low-calorie, low-sodium, low-fat, gluten-free, and vegetarian choices. Its efforts haven't gone unnoticed, with it being voted among the top 10 best family restaurants by Parent Magazine in 2009 and 2011.

Fiesta Restaurant goes even further than Noodles & Company with respect to its commitment to food quality. It differentiates itself from its peers in three key aspects.

Firstly, Fiesta Restaurant takes the concept of fresh to a new level. It uses made-from-scratch salsas and sauces, and makes most of its offerings such as flour tortillas fresh every day.

Secondly, customers have to see certain things for themselves to be convinced. Fiesta Restaurant employs an open display kitchen format, allowing its diners to see how food is cooked to order and freshly prepared.

Thirdly, Fiesta Restaurant is aware that more people are having their meals on the go. It is addressing that market by having more portable menu options such as wraps, sandwiches, and bowls. It also provides varying portion sizes to cater to the needs of people on a diet.

Source: Fiesta Restaurant Group

Future growth
Not only is Fiesta Restaurant well-positioned as a "value-for-money" restaurant, it also has significant growth potential relative to its peers. Its combined restaurant unit count for the two brands of 278 pales in comparison to the 300-odd and 1,500-plus restaurants that Noodles & Company and Chipotle have, respectively.

Its Pollo Tropical brand is expanding beyond Florida and the Southeast of the country, with its first Texas store being built. The Pollo Tropical brand is also extending overseas via franchising. For its other brand Taco Cabana, Fiesta Restaurant is developing a new "Cabana Grill" concept that will open in Atlanta this year.

Foolish final thoughts
Fiesta Restaurant started 2014 on a good footing, growing revenues and EPS in the first quarter of 2014 by 9% and 65%, respectively. This gives investors confidence that Fiesta Restaurant should have no problem meeting its long term targets of 10%-12% revenue growth and 8%-10% company-owned restaurant growth. In my opinion, Fiesta Restaurant is one of the most exciting growth plays in the fast-casual restaurant segment thanks to strong customer loyalty built on its value pricing and high-quality fresh food offerings.