Rubio’s Restaurants, Inc.

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Rubio’s Restaurants, Inc.

1902 Wright Place, Suite 300
Carlsbad, California 92008
U.S.A.
Telephone: (760) 929-8226
Toll Free: (800) 354-4199
Fax: (760) 929-8203
Web site: http://www.rubios.com

Public Company
Incorporated: 1985
Employees: 2,738
Sales: $67.9 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: RUBO
NAIC: 722211 Limited-Service Restaurants

Rubio’s Restaurants, Inc. operates a chain of over 100 Rubio’s Baja Grill restaurants, most of which are located in Southern California, where the company was founded. In the greater Los Angeles area alone there are over 40 restaurants, but Rubio’s has also expanded into four other states: Arizona, Nevada, Colorado, and Utah. In 1999, these accounted for 23 of the company’s units. The fast-service restaurants serve over 40 dishes based on the cuisine of the Baja region of Mexico, including a fish taco that was founder Ralph Rubio’s first menu item when he opened business at a small stand in San Diego. The chain’s menu now features many other seafood items, including lobster burritos and shrimp quesadillas, but each restaurant also serves marinated, grilled steaks and chicken. Although Rubio’s provides fast-food service, each chain unit prepares much of its food on a daily basis, ensuring, for example, fresh salsa, guacamole, sauces, beans, rice, and chips. Also, although there is a take-out service, the grills have a casual, Baja-inspired atmosphere which encourages in-house dining. There are aquariums, patio tables shaded by thatched-palm palapa umbrellas, even decorative surfboards. However, without the restaurants’special atmosphere, Rubio’s dishes are also sold at other outlets in and near San Diego, including the Del Mar Racetrack and QUALCOMM Stadium.

1982-87: Creating a Market for Rubio’s Signature Fish Taco

According to Ralph Rubio’s own account, Rubio’s Baja Grill resulted from a challenge made by his father Ray (Rafael) “to get off his surfboard and make something of his life.” It was 1982, and although Ralph had no business experience of note, he did have a good recipe for making what became the chain’s signature menu item—its fish taco. He had gotten the recipe at a taco shop in San Felipe, a fishing village in Baja California, where, in the mid-1970s, he and other student friends from San Diego State University used to take their spring break. After sampling the fare at the shop, Ralph knew that he had found a very tasty and rather unique Mexican dish. He wangled the recipe from Carlos, the obliging counter man, took it home and began making fish tacos for family and friends.

With the financial backing and business acumen of his father and the help of his brother Robert, Ralph Rubio bought a small building in the Mission Bay section of San Diego and, in January of 1983, began making and selling his unique tacos under a sign reading “Rubio’s. The Home of the Fish Taco.” Before opening that first Rubio’s, Ralph Rubio had only limited experience in managing a restaurant. He had starting working as a waiter in 1978, largely to have daytime hours free for the beach, but it was only after making his deal with his father that he got some managerial experience as an assistant manager at the Pier Company restaurant in Seaport Village. Thus Rubio’s had an un-assuming but fairly risky start for a restaurant chain that by 1999 had sold more than 35 million fish tacos. The family, using Ray Rubio’s initial investment of $30,000, bought the building at a “distressed” sale for $16,000. Previously a hamburger grill, it was little more than a stand, but it would do. Not knowing whether the business would take hold, the Rubios started out frugally. In order to save money while learning and building the business, Ralph elected to move back into to his parents’ home.

The careful start soon paid off. The fish taco became a favorite treat for the crowd of young surfers in the neighborhood, and the initial unit’s success soon encouraged expansion plans. In fact, from the outset the Rubios began reinvesting the company profits, building a chain, first in San Diego, then beyond. However, expansion was slow and cautious at first. It was three years before the company opened its second restaurant, located on College Avenue near San Diego State University. In the next year, 1987, it added another unit. It also reached $1.6 million in sales. By that time, Ralph Rubio had moved out of the kitchen. Though he continued to do his own marketing and advertising, his principal concern was management, making sure that the company in its growth made the right decisions.

1988-91: Expanding into New Markets Despite Decade-End Recession

In 1988, the company added three more Rubio’s Deli-Mex restaurants, as they were then called. Although the chain was still relatively small, consisting of just six units, it had started moving into new market areas. Rubio’s opened one of its units in San Marcos, an inland community that provided a test of the company’s chance of catching on in a locale where residents had no knowledge of Baja cuisine and demographically differed from beach areas where younger and more active people tended to congregate, a group more willing to try novel foods.

Believing that the San Diego market, though very profitable, was almost saturated, Ralph Rubio had adopted a strategy of opening additional units first throughout San Diego County and then in North County, Orange County, and Los Angeles, which offered a much larger market potential than San Diego. Original plans called for buying land for the new units, but Rubio felt that commercial property in promising locales often sold at prohibitive prices, which forced the company to continue leasing land at its new sites. Initially, Rubio’s tried to finance its expansion from its profits, but when its rate of growth picked up, it had to rely on bank loans. That slowed growth somewhat, as did the recession of the late 1980s.

1992-2000: Growth of the Chain and Going Public

Growth of Rubio’s in the 1990s greatly accelerated, particularly between 1998 and 2000. At the end of 1992, the chain consisted of 16 restaurants employing about 300 people. These had combined sales of $8.9 million. Also, they were still wholly under the family’s control, but continued growth was clearly going to make a strict family-management impractical if not impossible. When the chain grew to 26 locations, during 1996, the company began extensive recruiting outside the family.

Over the next four years, the company worked to put together a strong executive team and solid board of directors. Ralph Rubio remained at the company’s helm as president and CEO, and after his father’s retirement in 1999, he also became chairman of the company’s board. Many new members of the team brought important experience from their previous work at other fast-food and other retail chains. They included chief operating officer, Stephen J. Sather; chief financial officer, Joseph Stein; chief marketing officer, Bruce Frazer; and director of real estate, Ted Frumkin.

Among other things, they faced some stiffening competition from other chains. At least in Southern California, the fish taco was becoming popular enough to attract tough players, even the fast-service, Mexican-food giant, Taco Bell, which started offering its own version of the famous fish taco in mid-decade.

However, the greatest challenge was a happy one—coping with success. In 1995, Rubio’s Baja Grill units numbered 23. By the end of the following year, they had increased to 31, in 1997 to 43, and in 1998 to 59. That represented an annual average growth rate of nine units between 1995 and 1998. The strong sales in the same period justified the accelerated expansion. Same-store increases in sales hit double digits in both 1997 (18 percent) and 1998 (10.4 percent). Those figures prompted Rubio’s decision to go public, which it did in 1999, when it made its first stock offering of 3.15 million shares of common stock, traded on the NASDAQ, priced at $10.50 per share.

Prior to that, financing had been achieved through private placements of Rubio’s stock, made possible because of the company’s solid reputation. The fact that in 1993 the U.S. Small Business Administration had named Rubio’s California’s most successful entrepreneurial business helped. Between 1995 and 1997, the company privately placed convertible preferred stock totaling $17.6 million.

Through its initial public offering in 1999, the company raised an additional $23.4 million, allowing it to finance the opening of 31 new restaurants, giving it a total of 90 Rubio’s Baja Grill locations. It also tapped into four new markets: Denver, Salt Lake City, Sacramento, and Tucson. With that single-year 50 percent increase in its total number of units, Rubio’s primary challenge was to maintain the quality of its operation. Its special development and operations teams accomplished that feat with no major difficulties.

Rapid growth carried risks, of course. Among other things, the company could not afford to invest in property for its new Baja Grills during its accelerating expansion. As a result, the company continued to lease all of its restaurant locations, with, of course, the sole exception of its initial unit. Its plans for expansion into the next century called for the continued leasing of property. To keep the expense of adding new restaurants down, the company was determined to operate within very specific cost and size limits. Historically, Rubio’s restaurants ranged between 1,800 and 3,600 square feet in size, with its smallest units located in food courts. New plans called for selecting sites for units with a footprint ranging between 2,000 and 2,400 square feet, with an average start up cost of about $380,000.

Company Perspectives:

As we move into 2000, the growth potential for our concept is greater than ever before. Major fast-food Mexican chains have done an excellent job of educating people about Mexican food. In most regions, tacos and burritos are no longer a new or exotic idea. In addition, with the expansion of a number of casual dining Mexican chains, many consumers are also now becoming aware that real Mexican food is not ground beef and reheated beans. We believe that consumers are ready for high quality Mexican food in a quick service format. Our goal is to fill that demand on a national level.

Ways to ensure efficiency and economize without sacrificing quality in food or service became the study of Rubio’s growing managerial team throughout the 1990s. For example, in 1998, Rubio’s hired Paul Wartenberg as director of information technology. He joined the company from CKE Restaurants, parent company to two fast-food chains. His job was to ensure that Rubio’s, in adapting computer technology to its expansion needs, took no costly false steps. Other moves were made to achieve cost-cutting efficiency. Among other steps, in the winter of 2000, Rubio’s signed a contractual agreement with Alliant Foodservice Inc., which provided centralized distribution of all food and paper products to the company’s chain of restaurants.

Starting in 2000, the company also initiated a franchise program to help its expansion into new markets. The stratagem called for partnering with other chain operators. Plans also called for opening 36 new restaurants in 2000 and 41 more in 2001, mostly in the company’s existing markets, where brand recognition was high and was being regularly reinforced through radio and television advertising. A milestone was reached on March 27, 2000, when, in Pasadena, Rubio’s Restaurant Inc. opened it 100th Rubio’s Baja Grill. At that time, Ralph Rubio indicated that the achievement was just the beginning of the company’s efforts to create a nationwide chain.

Through its development into a chain of 100 plus restaurants, Rubio’s has acted like a company that can meet its own expectations, one that will stake a solid nationwide claim to a significant share of a very tough market. Its vitality has been reflected in its upbeat, forward-looking strategies and timely moves. As even its Baja Grill menu suggests, it has been on the go from the beginning, year by year trying new dishes and varying the menu that began simply with its famous fish taco as its centerpiece. Most all additions have been based on the Mexican cuisine of Baja California. Some of the new dishes, like Rubio’s Lobster Burrito, became almost as popular as the original offering. Other favorites included char-grilled steak, chicken and seafood items that became staples on the menu. Like most of the better fast-food chains, Rubio’s never stopped experimenting with its menu and frequently offered promotional items that might or might not find a permanent menu slot, depending on their popularity. In 1999, for example, the company introduced a Tequila Shrimp Burrito garnished with a new mango-tequila salsa, Shrimp and Crab Enchiladas topped with a jalapeno cream sauce, and a Grilled Chicken Salad. The trick will be to make those exotic sounding entrees as popular across the land as they have proved to be in Rubio’s established markets.

Principal Subsidiaries

Rubio’s Restaurants of Nevada, Inc.

Principal Competitors

Del Taco Restaurants Inc.; Prandium Inc.; Taco Bell Corp.; Wahoo’s Fish Tacos.

Key Dates:

1983:: Ralph Rubio’s family begins business at stand in Mission Bay area of San Diego.
1986:: Expansion begins with opening of second restaurant; Rubio’s sells its one-millionth fish taco.
1991:: Company expands into Orange County.
1995:: Rubio’s completes a $3.5 million private placement.
1996:: Company adds a $4 million private placement.
1997:: Restaurants become Rubio’s Baja Grills and expand into Phoenix and Las Vegas markets; company also completes another private placement of $10.1 million.
1999:: Company goes public.
2000:: Rubio’s opens its 100th Rubio’s Baja Grill.