Qdoba Mexican Grill has reworked its menu pricing as part of a brand repositioning intended to bring the fast-casual chain back to life.
The 638-unit chain, part of San Diego-based Jack in the Box Inc.’s portfolio, conducted guest research that found that diners felt “nickeled and dimed” when asked to pay extra for items such as guacamole or its popular queso sauce. That added up to $1.50 more per serving with certain dishes.
“They also felt the menu was overly complex and that the ordering process itself was more complex than it needed to be,” Qdoba president Tim Casey said.
Rather than charging more for certain ingredients, the chain has moved to a two-tier pricing structure built around the choice of protein.
Prices vary by market, but Tier One includes one price for meals built around vegetables, ground beef and chicken, while Tier Two has a set price for entrees with pork, steak and shredded beef.
“It’s really an enhanced, simplified menu,” Casey said. “Now, when a guest comes in and sees one price for a chicken burrito, they can add whatever they want without adding to the price. It gives tremendous peace of mind [to customers] knowing there will be no surprises.”
Tests indicate that guests “really appreciate the fact that the price they see on the menu board is the price they’re going to pay,” he noted.
It’s difficult to gauge whether the new pricing format will mean higher prices overall for customers because of the range of ingredients, Casey said. Some guests find their favorite dish costs a bit more under the one-price plan, while others may find that it costs less.
The change required the rollout of new menu boards outlining the simplified process as guests walk the line.
Restaurants began installing the new pricing and menu boards in late September, and the rollout is expected to be complete by the week of Oct. 14 at both company and franchised locations.
The new pricing format comes as analysts speculate about the potential spinoff of Qdoba from parent Jack in the Box Inc., following estimates of the brand’s valuation near $1 billion within the next two years.
Casey declined to speculate on rumors in an interview with Nation’s Restaurant News.
In third-quarter earnings calls with Wall Street analysts, company officials deflected questions about a possible spinoff, citing continuing plans to grow both sales and units at Qdoba as part of a combined company with quick-service sister brand Jack in the Box.
However, KeyBanc Capital Markets Inc. analyst Christopher O’Cull said in a report this week that he expects management to reconsider.
O’Cull estimates that Qdoba’s earnings before interest, taxes, depreciation or amortization, or EBITDA, will hit $70 million to $75 million in fiscal 2016, compared with $40 million in fiscal 2013. With that growth, Qdoba would represent about 24 percent of the combined company’s projected EBITDA. Qdoba represented about 17 percent in fiscal 2013.
“Assuming our FY16 Qdoba EBITDA estimate of $70 million to $75 million and the chain trades in line with the fast-casual segment median, then its valuation would approximate $1 billion in two years,” O’Cull said.
While a full spinoff may be challenging, given the cost and difficulty of separating the combined infrastructure between the two companies, “the company may consider selling a minority stake of Qdoba to shareholders via an initial public offering,” O’Cull said, similar to the way McDonald’s spun off Chipotle in stages in 2006.
“We view a carve-out of less than 20 percent of Jack in the Box Inc.’s ownership interest in Qdoba to shareholders as feasible, implying JACK would still maintain significant control of Qdoba,” he wrote. “However, the spinoff would likely be a micro-cap stock, which could result in a lower valuation.”
Refresh efforts taking hold
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Looking ahead, Qdoba is working on a new restaurant design that it plans to begin testing in 2015.
Qdoba’s brand refresh began last year after the company closed 67 underperforming units and hired a consulting group to re-evaluate its positioning.
The company also hired Casey, formerly chief executive of Famous Brands International, to develop a plan to move Qdoba forward within the crowded fast-casual Mexican niche, which has been long dominated by Chipotle Mexican Grill.
Efforts appear to be taking hold.
For its July 6-ended third quarter, Qdoba reported that same-store sales increased 7.5 percent, including a 2.7-percent increase in transactions. Qdoba’s same-store sales rose 7 percent in the second quarter as well.
The chain has benefitted from double-digit growth in catering and an increase in average check as it moved away from discounting.
Jack in the Box Inc. officials upgraded Qdoba’s outlook for the year, saying same-store sales will likely increase between 5 percent and 5.5 percent, compared with an earlier projection of increasing 3 percent to 4 percent.
About 60 new Qdoba restaurants are expected to open in 2015, about half of which will be company owned. This year, the company expects to open a total of 40 to 45 new units, 15 to 17 of which will be company owned.
Growth will focus on filling in new locations in existing markets, with an eye toward nontraditional locations in airports and university campuses, Casey said.
Contact Lisa Jennings at [email protected].
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