Fresh Enterprises, Inc. Business Information, Profile, and History

Company Perspectives:

Baja Fresh is all about choices that fit the way you eat.

History of Fresh Enterprises, Inc.

A subsidiary of Wendy's International, Inc., Fresh Enterprises, Inc. is a Thousand Oaks, California-based company that operates the Baja Fresh Mexican Grill chain of more than 300 fast-casual restaurants located in some 26 states and Washington, D.C. Baja Fresh trades on a reputation for serving Mexican food using the freshest ingredients and avoiding the use of microwaves, freezers, or MSG. A sign that has graced the design of the main counter over the years reads, "No can-openers, no freezers, no lard." Steak is hand-trimmed, USDA Choice; chicken breasts are served boneless and skinless, marinated, and charbroiled; and salsa is prepared daily. Made-to-order items include burritos, tacos, salads, quesadillas, nachos, and such specialties as chicken picado, steak picado, taquitos, fajitas, and enchiladas. Side orders include guacamole and chips, cebollitas, salsa, black or pinto beans, rice, and rice and beans. Because preparation time at Baja Fresh is much longer than rival fast-casual Mexican restaurants, such as McDonald's owned Chipotle Mexican Grill, management is taking steps to simplify the menu.

First Restaurant Opens in 1990

Baja Fresh was founded in 1990 by James Magglos and his wife Linda, who had no experience in the restaurant business. In 1978, when he was in his early 20s, Magglos began operating an automobile detail and window tinting shop in Westlake Village, California, but he always harbored a dream of one day running a restaurant. He also loved Mexican food. As Magglos told the Ventura County Star in a 1997 profile, "I just wanted to have a great place and serve food the way I like it." To launch their restaurant, Magglos and his wife took out a third mortgage on their home. In Newbury Park, where the couple lived, they found an affordable location, one that over the years had housed a number of eateries: Uncle Stink's Hot Dogs, Porky's Ribs, and Casey's Hamburgers. In August 1990, the first Baja Fresh Mexican Grill opened on this site. The quick-service restaurant was an immediate success, tapping into several trends. A number of Mexican food concepts were emerging from California, but the emphasis on fresh ingredients helped to differentiate Baja Fresh from many of its competitors and proved popular with customers who were becoming more health conscious about their eating habits. "We make everything in our stores fresh daily. It's not processed somewhere else and sent to us," Magglos explained to the County Star. "A tomato is a real tomato and we make it into salsa. Another thing is our chicken. We use only chicken finger, which is that small piece of meat under the chicken breast. It's like the filet mignon of the chicken, the tenderest, most flavorable part. And there are only two on each chicken." Baja Fresh also benefited from the rising popularity of the fast-casual restaurant concept, which was not quite fast food and not quite full service. The price points were higher than fast food, but the ingredients were fresher. Although they lacked the ambience and service of a full-service restaurant, fast-casual restaurants were quicker and more convenient, a combination that appealed to the fast-paced lifestyle of many customers. Baja Fresh also distinguished itself because of "intangibles," as described by Magglos to the County Star: "For example, our stores are immaculate from the front to the bathroom. We're the type of establishment where the health inspector will have lunch after he does his job. All of our people make more than minimum wage. Even our dishwashers get vacations, so we have an attitude in our stores that is different."

The Maggloses added two more Baja Fresh restaurants in 1991 and another three while launching a franchising effort in 1993. Because Baja Fresh proved so popular, enjoying something of a cult following, Magglos received many inquiries about franchises, but he was selective about the partners he would accept. The first franchise unit, and the seventh overall in the Baja Fresh chain, opened in Oxnard, California, in November 1994. The first franchise owners were Darren Utley and his father-in-law John Dobbert. Utley had owned eight Domino's Pizza franchises but had been a regular customer at the Baja Fresh restaurant located in Simi Valley and loved the food so much that he decided to drop Domino's in favor of Baja Fresh. Dobbert, a former school teacher, also had strong experience as an entrepreneur and had been involved in running a restaurant as well as owning three Penquin Frozen Yogurt franchises.

Because Magglos was selective about franchisees, the Baja Fresh chain grew at a slow pace during the first half-dozen years. It eventually expanded beyond southern California and outside the state itself, with unit openings in Phoenix, Las Vegas, and Denver. By the end of 1997, there were 34 restaurants generating $33.7 million. Another 13 units would open in 1998 as the chain gained a toehold on the East Coast with openings in Fairfax, Virginia, and Rockville, Maryland. Sales in 1998 improved to $54.9 million. About a quarter of the 47 units were company owned.

Turning Point in 1998

Baja Fresh also reached a major turning point in late 1998: the Maggloses sold a controlling interest in Fresh Enterprises to Greg Dollarhyde and Pete Siracusa, both of whom were involved with another fast-casual chain, Rusty Pelican, which Siracusa founded. Magglos retreated from day-to-day operations, retaining a minority interest with his wife and a seat on the board of directors, while Siracusa assumed the chairmanship and Magglos became president and chief executive officer. Dollarhyde, a graduate of Cornell University's prestigious School of Hotel Administration, had experience working at Pizza Hut, served as vice-chairman of Kenny Rogers Roasters, and had been president and chief executive of Country Harvest Buffet. Supplying the financial backing for the deal was Catterton Partners, a Greenwich, Connecticut-based private equity firm that made a specialty of restaurant investments. The firm owned a controlling interest in Wolfgang Puck Food Co. and also invested in P.F. Chang's China Bistro, La Madeline French Bakery & Café, and Caribou Coffee. Also taking minority positions in Fresh Enterprises was Minneapolis-based Oak Investment Partners and New York-based Grumman Hill Group.

Some of Baja Fresh's loyal customers expressed concern that the sale of the chain would lead to a drop off in quality, but Dollarhyde remained committed to the concept of relying on fresh ingredients, and he became even more of a stickler for quality control than the chain's founders. During most of the first year he was in charge, expansion took a backseat to the design and implementation of systems to protect the integrity of the supply chain and ensure consistency among restaurants, whether they were company owned or franchise operations. Dollarhyde supplemented Baja Fresh inspectors with independent secret shoppers. Rather than have employees measure and bag spice for beans, with the danger that quality might vary between stores, he had the suppliers provide prepacked spice packages and precisely measured sacks of beans. Restaurant refrigerators were organized with dated containers to make sure no ingredients were kept for an extended length of time. Grated cheese, for example, had to be used within 24 hours, whereas other restaurants would add corn starch and continue to use the cheese, despite the detrimental effect on taste and texture. Customers were not only reassured by the changes Dollarhyde made after taking over, they patronized Baja Fresh in even greater numbers.

While Dollarhyde laid the foundation for maintaining quality control that would allow Baja Fresh to expand more rapidly without compromising its principles, the chain added just ten new restaurants in 1999, bringing the total to 57. Revenues for the year increased to $74.8 million. In 2000, Baja Fresh added 39 units and sales reached $106.8 million. The chain expanded even more rapidly in 2001, opening 55 restaurants and growing sales to $176.7 million, to go with operating income of $6.5 million. Moreover, same-store sales grew by 7.8 percent over the previous year.

In 2002, Baja Fresh awarded a franchise agreement for Greater Boston, Massachusetts, to Northern Foods Services Inc., an experienced Rockville, Maryland-based restaurant company that agreed to develop at least 14 Baja Fresh restaurants in five years and as many as 30. Also in 2002, Baja Fresh signed a franchise agreement with Lettuce Entertain You Enterprises, headed by well-respected restaurateur Richard Melmann, to develop 16 Chicago-area restaurants. Lettuce Entertain You operated three dozen restaurants, including such successful Chicago establishments as Ambria, Everest, Shaw's Crab House, Tru, Wildfire, Foodlife, and Nacional 27. In addition, the company operated restaurants at the Paris Las Vegas resort. Like other Baja Fresh franchisees, Melmann started out as a customer. His son first took him to a Baja Fresh restaurant, and later, at a baseball game, he met a Baja Fresh investor, ex-basketball star Rick Barry, who encouraged him to become involved in the business. Later in 2002, Allen Bernstein, the CEO of the Morton steakhouse chain, also came on board, securing the rights to develop at least 16 Baja Fresh restaurants in his native Long Island.

Baja Fresh under Wendy's: 2002 and Beyond

To finance continued expansion, in May 2002 Fresh Enterprises registered with the Securities and Exchange Commission its intention to make an initial public offering of stock (IPO). At this stage, the Baja Fresh chain totaled 157 units, of which 72 were owned by the company and 85 were franchise operations. The goal of the offering was to raise $57.5 million, with $30 million earmarked for expansion and an unspecified amount to be used to pay down debt. Banc of America Securities was slated to serve as the lead underwriter, but the offering never took place. Instead, Wendy's stepped in and offered $275 million for 100 percent of Fresh Enterprises, a deal that Banc of America would now broker. Dollarhyde and the officers of Catterton Partners weighed the potential of an IPO against the $275 million in cash that Wendy's put on the table and quickly decided that going with Wendy's was the wiser choice. Catterton and the other investors made a tidy profit, while Dollarhyde was able to stay on to run Fresh Enterprises as a Wendy's subsidiary and now had the resources and the financial backing of a corporate parent with deep pockets. For Wendy's, acquiring Baja Fresh at a premium price made sense because it was playing catch-up with the likes of McDonald's Corp., which had entered the fast-casual segment by acquiring Boston Market and Chipotle Mexican Grill. Wendy's hope was that the Baja Fresh chain could grow to between 600 and 700 units within five years. To accommodate that growth, Fresh Enterprises leased additional office space. Earlier in the year, it agreed to lease half of an office building under construction in Thousand Oaks, some 12,000 square feet, but now added the remaining 10,000 square feet.

By the end of 2002, the Baja Fresh chain numbered 210 units and revenues topped the $250 million mark. Dollarhyde expressed his delight with the company's new ownership, telling Chain Leader, "A good 25 percent of my job was finding money, recruiting money, developing money and communicating with people who gave me money." In addition, by forgoing the IPO, he did not have to deal with the pressures that came with the public markets. However, he would soon find out about the pressures that came with heading a subsidiary of a large public company like Wendy's. Baja Fresh began to post disappointing results, with same-store sales declining by 4.6 percent in 2003. A sluggish economy and the chain's rapid expansion were blamed, as well as the effects of over saturation in the southern California market where Baja Fresh restaurants took customers from one another. Cooking so many items to order, in many ways a strength of the chain, also led to lengthy service times, which were almost twice as long as Chipotle. To make matters worse, while Baja Fresh was blaming the economy for poor results, Chipotle enjoyed a 24.5 percent increase in comparable-restaurant sales for 2003. As a result of its poor performance in 2003, Baja Fresh cost Wendy's nine cents in share earnings for the year.

Although it was unclear whether he quit or was fired, Dollarhyde was replaced as chief executive in April 2004 by William Moreton, former chief financial officer of Panera Bread Co. Moreton also had executive experience at Quality Dining Inc., where he was CFO, and Houlihan's Restaurant Group, which he helped to put into bankruptcy during his days as a banker with Credit Agricole and then joined to restructure. This task began his direct involvement with the food service industry.

Moreton conducted a market-by-market review of operations, and in August 2004 the company slowed down its plans for expansion, as well as deciding to close five underperforming restaurants, thereby exiting Atlanta, Georgia; Charlotte, North Carolina; and Tucson, Arizona. Baja Fresh also began looking at ways to improve service time. One solution was to reduce the size of the menu, which featured many made-to-order items that extended service times. Nevertheless, the chain wanted to introduce new products in all of its major categories in order to prevent the menu from becoming stale to regular customers. The obvious solution was to rotate some items on and off the menu, a practice that Moreton used at Panera to good effect. Baja Fresh also looked to improve its advertising, taking advantage of the input available from Wendy's marketing personnel. Although the chain had suffered the first major setbacks in its 15-year history, Baja Fresh remained a strong concept and continued to enjoy the backing of its corporate parent.

Principal Divisions: Baja Fresh Mexican Grill.

Principal Competitors: Chipotle Mexican Grill, Inc.; Moe's Southwest Grill, LLC; Rubio's Restaurants, Inc.; Santa Barbara Restaurant Group.

Chronology

• Key Dates:
• 1990: The first restaurant opens.
• 1994: The first franchised restaurant opens.
• 1998: Greg Dollarhyde is named CEO after the sale of the company to Catterton Partners.
• 2002: Wendy's acquires the Baja Fresh chain.
• 2004: Dollarhyde is replaced by William Moreton.