Don't Go Crazy for El Pollo Loco

A new fast-casual chain is trying to make its way into the hearts and stomachs of Wall Street.

Andrew Marder
Andrew Marder
Jul 28, 2014 at 12:31PM
Consumer Goods

Fast and casual may be the restaurant industry's biggest buzzword right now. After the success of companies like Chipotle Mexican Grill (NYSE:CMG), everyone and their burger-slinging brother wants a piece of the fast and casual action. Today, another entrant appeared, El Pollo Loco (NASDAQ:LOCO), a self-described "differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken in front of [its] customers." The shares went to the investor market at the top of its $13 to $15 range, and had risen from $15 to over $19 by midday.

While the Chipotle system has been replicated a number of times, no one has been able to re-create the same magic that the burrito chain has seen. El Pollo Loco may fire-grill a mean chicken, but like others before it, it seems destined to fall short of Chipotle's success, leaving investors underfed and overhyped.

The long chain of chains
I had the same reservations about Noodles & Co (NASDAQ:NDLS) and Potbelly (NASDAQ:PBPB) that I have about El Pollo Loco. These are companies that seem to exist on a clever idea and are entering a crowded marketplace. The thing that differentiates Chipotle isn't just the "make it in front of you" shtick, it's the sourcing of ingredients, the taste of the final product, and the convenience of a burrito.

Where can you get chicken? Better yet, where can you not get chicken? El Pollo Loco is trying to fight its way into a market that's already saturated with major chains and wannabes. This is the same problem that Potbelly has run into. With declining same-store sales, Potbelly is realizing that it's not the only game in town, and that established players have a lot of ways that they can make it difficult for a startup sandwich store to get any momentum.

Meanwhile, Noodles & Co. is suffering from being a place where you get a bowl of noodles. The premise is clever, but the execution is weak. Sales have failed to take off, with comparable-store sales falling and margins being squeezed along the way.

Chipotle vs. the world
It may seem like an unfair world where one company can thrive while imitators fall by the wayside, but it's the nature of Chipotle's business. The company relies on making a connection with its customers in order to sell burritos to millennials and other conscientious consumers.

El Pollo Loco has none of that backstory or vision. It's not to say that the company won't make money or that it doesn't serve tasty food, but it's not going to be the next Chipotle. Investors have been blinded by the success of Chipotle and keep hoping they can hop on the bandwagon to the next big success. For all of its effort and all of Wall Street's hope, El Pollo Loco isn't that wagon.