Baja Fresh purchase looking spoiled: Wendy's rollout of stores falters.

When Wendy's International Inc. bought Baja Fresh in 2002 for $275 million, it was heralded as the perfect marriage.

Wendy's, the nation's No. 3 hamburger chain, diversified its offerings while adding a proven concept with a track record of growth. Thousand Oaks-based Baja Fresh got a deep-pocketed partner that could bankroll its desire to more than triple its unit count by 2007.

Less than three years later, the marriage has stumbled.

Earlier this month, Wendy's reported that year-over-year same-store sales at Baja Fresh declined by 6.3 percent for 2004; that followed a 4.6 percent drop the year earlier. The declines have some analysts suggesting that if things don't turn around soon, Baja Fresh could find itself being shopped.

Wendy's dismisses the notion that it might sell the chain, noting that while a poorly executed Midwest rollout has resulted in a drag on earnings, it continues to perform well on both coasts.

"We are taking a number of steps to improve Baja's performance," said Bob Bertini, a Wendy's spokesman. "We're moving forward."

To get there, Wendy's has tapped Sacramento-based advertising agency Glass/McClure to take over the Baja Fresh account. The new campaign is expected to concentrate more on Baja Fresh's food offerings and less on celebrity-driven messages.

In addition, interiors are being reworked to soften its black-and-white motif some consider too institutional. The stores will be splashed with warm colors, and tables are being lowered to child-friendly heights.

Different menu items are being added, as well, including tortilla soup and a fajita burrito. "We are looking for new opportunities to give our customers different taste experiences," he said.

In some ways, the troubles should not come as a surprise--big national firms have a spotty record when it comes to acquiring regional businesses.

One glaring example was Quaker Oats Co.'s purchase of Snapple Beverage Group in 1994 for $1.7 billion. Shortly after the acquisition, competitors flooded the market, cutting into Snapple's market share. Quaker's effort to revitalize the brand with marketing, operational and organizational initiatives fizzled, and it ended up selling the brand three years later for $300 million. (Snapple fared batter after the sale and was bought in 2000 by Cadbury Schweppes pie for $1.45 billion.)

Wendy's, based in Dublin, Ohio, installed a new management team last year and is looking to revive the quick-casual brand (considered the midpoint between sit-down and fast-food in which food is generally made to order and ready within a few minutes).

The effort addresses what analysts say are symptoms of Wendy's pushing Baja Fresh's expansion too fast--poor location choices, tepid advertising campaigns and lackluster store designs.

"Every restaurant company that has gone national has had periods of time where there have been sales challenges, growth challenges," said Greg Dollarhyde, chairman of TD Food Group Inc. and Baja Fresh's chief executive before Bill Moreton assumed the position last year. "But when a brand is strong enough it can make the national transition."

When Wendy's purchased the chain it had 169 locations in 16 states and the District of Columbia. Nearly two-thirds were in California. Now, there are 300 eateries, almost half in California.

The company expected to add 69 locations last year but ended up with only 40. At the same time, it closed 20 operations. This year, Baja Fresh expects to add 20 to 25 sites.

"They are definitely closing the worst stores, and they slowed up new development so they can kind of tweak their model," said Wally Butkus, an analyst at Restaurant Research LLC.

Welcoming the slowdown, Stephen Pettise, a Baja Fresh franchisee and a restaurant marketing consultant at Golden Spike Resources Group, said too many Baja Freshes popped up in some areas, forcing them to compete for the same customers. Others had poor visibility. "The key is to be more cautious about where you expand and how quickly you expand," he said.

Baja Fresh says it is being more careful about site selection. "What we are trying to do is pay close attention to where we locate our stores to make sure they are in optimum areas," Bertini said.

Meanwhile, competitor Jack in the Box Inc. has grown its Mexican fast-casual brand Qdoba at a relatively conservative pace--the 198-unit chain company added 20 units last year--and has located new stores in proximity to older stores to heighten brand recognition.

"Baja is kind of spread out all over," said Butkus. "If they are growing concentrically they will start in a seed market and grow, that would make more sense."

Advantages of big parent

Even if Baja Fresh expanded perfectly, analysts suspect that the chain would have been dinged by the growth of its competitors. The crowded Mexican quick-casual field includes McDonald's Corp.'s Chipotle, CKE Restaurants Inc.'s La Salsa and Rubio's Restaurants Inc.

In 2002, Baja Fresh's 38 percent share of the quick-Mexican market led its competitors, according to Technomic Information Services. The next year, Chipotle passed Baja Fresh with 38 percent of the total sales to Baja Fresh's 37 percent.

That growth may be due to Chipotle's shorter wait times, which average around three minutes, compared to six minutes for Baja Fresh, said Butkus.

Latching on to the resources of its parent company, Bertini said Baja Fresh is looking at what "supply chain improvements" can be made.

It is also focusing on the areas in which it is strongest. "We are concentrating on the West and East Coast to utilize improved site selection," he said. "That is where we are strong now. If you have more restaurants in an area, you can advertise and promote. Those are things you can't do as well when you have one store in an area. You are able to pool resources and have more economy of scale."