July 30, 1999

Rubio's Gambles On Fish Tacos In Landlocked States

By Ben Fox

Sixteen years ago, the Rubio family borrowed a Mexican recipe for fish tacos, spruced up an old hamburger stand and launched what has become a profitable Southern California restaurant chain.

Thirty-five million fish tacos later, the Rubios are heading into more perilous waters.

Flush with more than $28 million from an initial public offering this spring, and encouraged by rising popularity for Mexican food, Rubio's Baja Grill is going national.

``Our mission is to come in behind Taco Bell, to fill the vacuum for that quality, Mexican fast-food experience because nobody's doing that on a national level,'' says Ralph Rubio, the company's president and chief executive officer.

Rubio's, which has 77 restaurants, made its first foray outside of Southern California two years ago with an outlet near Phoenix. Now, there are more than a dozen outside the home market, including Denver, Las Vegas, Salt Lake City and Tucson.

The plan is to reach 123 restaurants by the end of 2000, but Ralph Rubio and his father Rafael - a Mexican immigrant who provided the $35,000 to open the first restaurant in 1983 - are vague about exact locations.

``We probably will want to grow along the sunbelt,'' Ralph Rubio said.

They don't rule out eventually opening restaurants in New York or even Mexico City, but for now they will concentrate on the West and Southwest, where it is easier to find vacant land, the appetite for Mexican food is well established and fish tacos are part of the regional cuisine.

While building customer loyalty on the fish taco - a beer-battered piece of fish served in a soft taco with shredded cabbage, salsa and tangy white sauce - Rubio's knows the delicacy may be a turn off in some markets.

They broadened the menu in 1997 to get the focus off fish tacos and to highlight burritos, tacos and quesa-dillas made from fresh, grilled chicken, steak and shrimp. Fish tacos now make up only about 20 percent of Rubio's sales.

Inside the restaurants, surf boards and palm-fringed fish tanks conjure up images of Mexico's Baja region, where Ralph Rubio borrowed the original fish taco recipe from a restaurant worker named Carlos during a spring break trip in the 1970s.

Restaurant analyst Allan F. Hickok of US Bancorp Piper Jaffray, one of the underwriters of the IPO, admits there's a chance the Rubio's theme might not travel to other parts of the country, but the food definitely will. He plays down the risk and rates the stock a ``strong buy'' for his clients.

``At the end of the day, what they're selling is a food product. We don't eat the image,'' he said.

The company had net income of $915,000 on sales of $45 million last year. It will report its results for the latest quarter in the first week of August.

Since the IPO on May 21, the shares, which opened at $10.50, have gained more than 33 percent. At least two restaurant industry analysts think the stock could hit $17 over the course of the year, but contend it won't be easy.

Few upstarts have carved out a niche in the nation's $100 billion fast-food market and restaurant IPOs have a lousy track record.

``Every once in awhile you get a winner. But then a large number of them fizzle out,'' said Jay Ritter, a professor of finance at the University of Florida who tracks initial public offerings. ``Big successes like Starbucks and McDonald's are few and far between.''

Even Starbucks, which Ralph Rubio considers a model, is vulnerable. Shares in the Seattle-based coffee chain dropped 28 percent on a single day July 1 after the company warned its earnings would fall 10 percent below their expectations for this year.

The biggest challenge to any chain restaurant is the extreme price competition and the resulting pressure on profit margins, said Dick Papiernik, financial editor of Nation's Restaurant News, a trade publication.

For example, Boston Chicken Inc. was considered a bright prospect when it went public in 1993. It had the largest first-day share gain ever until that point. But sales never reached the critical mass needed to survive nationally and the company filed for bankruptcy in 1998.

The Rubios are aware of all this. The 60-page prospectus for the IPO, as required, spells out every conceivable problem: a devastating consumer lawsuit, a health scare, no fresh tortillas in a new market, a nationwide economic downturn.

What's the biggest challenge? Ralph Rubio says it's entering new markets.

``You could do all the research and you could feel very strongly about it, but did you enter it the right way? At the right time?'' he said. ``But I believe that any market we enter, ultimately we are going to be successful.''

Return to Frontpage