When Darden Restaurants said it planned to buy a Mexican chain this summer, Wall Street analysts grilled its executives about how sit-down eateries in that popular ethnic sector had failed.
Rick Cardenas, president and CEO of Orlando, Florida-based Darden Restaurants, was reminded that operators such as Chi-Chi's, Rio Bravo Cantina, Don Pablo's and Casa Gallardo were all defunct after trying to expand and roll out full-service Mexican restaurants nationally. Those closings affected hundreds of retail properties.
Despite the nay-saying, Cardenas expressed confidence that Darden's proposed $605 million acquisition of Chuy's — an Austin, Texas-based chain with roughly 100 full-service Tex-Mex restaurants — would be an asset and accelerate growth at the restaurant company with holdings that include Olive Garden, LongHorn Steakhouse, Yard House, Ruth's Chris Steak House, the Capital Grille, Seasons 52 and Bahama Breeze.
"Whenever we consider adding a brand to our portfolio, we have a set of criteria we evaluate," Cardenas said back in July on the call with analysts. "The brand should be a full-service dining concept with strong guest appeal, have the ability to exceed the sales growth in our long-term framework and make an impact [on] our financial performance over time. Chuy's checks all these boxes ... With attractive unit economics and a strong business model, there is ample runway for new restaurant growth."
Darden is looking to beat the odds, in defiance of the spotty track record of corporate-owned full-service Mexican restaurant chains, with its pending purchase and planned expansion of Chuy's. Right now, there is no truly national U.S. Mexican casual dining leader, according to retail analysts. That provides an opportunity for Chuy's. At this juncture, Darden's hurdles include trying to open more Chuy's locations despite macroeconomic headwinds, as consumers pull back on spending to eat out even at chains like its value-oriented Olive Garden.
Mexican cuisine is one of — if not the most — popular and fast-growing types of ethnic dining in the United States. Chuy's will give Darden a piece of the action. Several retail analysts agreed that the Mexican restaurant sector still isn't saturated, but rather is highly fragmented with a multitude of players: in the fast-casual and fast food categories, high-flying giants such as Chipotle Mexican Grille and Taco Bell; regional full-service chains like Chuy's, On the Border Mexican Grill & Cantina and El Torito; small chains such as Rosa Mexicano; and a flock of local independent operators.
Past failures
Despite the food's popularity, most efforts to nationally scale full-service Mexican restaurant chains, where patrons can sit down and be served by wait staff, have flopped. In part, Wall Street analysts blamed those failures on different taste preferences in different regions and the inability of chains to attract repeat visits in part because of competition from local operators. In the case of Chi-Chi's, after filing for bankruptcy in 2002 its fate was sealed when a hepatitis A outbreak traced back to one of its restaurants resulted in the deaths of four people and made 600 others sick.
In addition, taco shops and burrito chains have gained popularity over full-service restaurants because of their "flavor profiles, the variety and the price points," according to Darren Tristano, CEO of restaurant consulting firm Foodservice Results.
Darden officials are undaunted. They said some of these failed players made the mistake of expanding too quickly in areas outside their original base, regions they weren't familiar with. Darden, with its existing national chains, also said it has the supply chain in place and experience to service and grow Chuy's footprint. There are synergies to take advantage of with Chuy's, as well, according to officials. Cardenas also said Chuy's doesn't have to evolve into a full-blown national chain to be a success for Darden.
"We've learned that sometimes when you grow too fast, brands outside of the core market, then you struggle for a bit," Cardenas said in July. "You just have to be methodical about the way you grow and stay true to who your brand is. ... That said, we think Chuy's is a great brand ... So it adds to our portfolio, gives us a cuisine that we're not in. It doesn't have to be national. It just has to grow faster than the high end of our framework and we believe it can do that."
Leader by sales
The acquisition has sparked criticism from some Chuy's shareholders, who filed two lawsuits and sent 13 letters to management expressing their displeasure with the $37.50 per share price Darden is paying. Chuy's stockholders on Thursday voted overwhelmingly to approve the sale.
Chuy's serves up Tex-Mex food in decor unique to each location and is the leading full-service chain in its ethnic dining category, spanning 15 states, according to Darden and several retail analysts. When ranking sit-down Mexican restaurants by sales, Chuy's is the largest and then comes Irving, Texas-based On the Border, Tristano told CoStar News.
"And when you get farther down, you really get into a lot of smaller full-service chains," he said. "So I think when Darden is looking at this market, they're looking at the leader [Chuy's]. ... Darden's strategy has always been to invest in underdeveloped full-service brands."
While Mexican food is a dining category that Darden hasn't been in, the company is a smart operator, James Cook, senior director of Americas retail research at real estate firm JLL, told CoStar News.
"It doesn't matter what category it is. ... They know how to run a restaurant," Cook said. "Darden's got experience operating multiple chains that are household names."
On the Border bills itself as the world's largest Mexican casual-dining brand, with 124 restaurants in the United States and internationally. But ranked by sales, Chuy's is the largest full-service Mexican chain with $453 million last year, nearly two times that of No. 2's $292 million, according to an investor presentation by Darden. It didn't identify the brand that ranked second, but presumably, it is On the Border, by virtue of the number of locations it has compared with other full-service Mexican chains.
'Opportune moment'
The crowded field of quick-service Mexican restaurants versus full-service chains may be providing a good window for Darden and Chuy's, according to Nicole Larson, manager of U.S. national retail research for real estate brokerage Colliers. It collects proprietary data on Mexican restaurants, and it found that from 2019 to 2023 sales at corporate-owned full-service Mexican restaurants were down 0.63%, while quick-service Mexican restaurants saw a 22.6% increase.
"This could be an opportune moment for Darden to enhance sales in the Mexican full-service restaurant segment with their acquisition of Chuy's, especially as the Mexican quick-service restaurant market appears saturated with major players like Chipotle, Taco Bell and Del Taco," Larson said in an email to CoStar News.
Darden isn't the only restaurant operator that has used an acquisition to gain entry or expand deeper into the Mexican dining sector. In 2022, San Diego-based Jack in the Box acquired Del Taco, headquartered in Lake Forest, California, for roughly $585 million. That same year, Pasadena, California-based Dine Brands Global, the parent of Applebee’s and IHOP, purchased Fuzzy's Taco Shop, based in Irving, Texas, for $80 million. And this summer, Sun Holdings, headquartered in Dallas, bought Austin, Texas-based Freebirds World Burrito for an undisclosed sum.
In an economy where consumers are being pinched financially by inflation, and cutting back on discretionary spending like dining out, Mexican food is believed to offer value for the dollar, according to several retail analysts. And that could be an advantage for Darden with Chuy's, they said.
"People are starting to feel it and just tightening the belt," Tristano said. "So I think that you're going to see that at the Olive Garden. ... But Chuy's tends to be a more elevated experience than an Olive Garden, so I think I think they're they're going to see less pullback there."
JLL's Cook had a similar take.
"Mexican food is often appealing in an inflationary market because a lot of people perceive it as a good value," he said. "So it's filling. It's relatively affordable."
Younger diners
Chains such as Chipotle have won fans with younger customers, and Darden officials have cited Mexican food's appeal to that younger demographic. And consumers who enjoyed chains like Taco Bell and Chipotle will grow older and marry and have families, and, at that juncture, when they go out to eat with the kids and grandparents on a weekend, they will likely want a sit-down restaurant with table service — like a Chuy's, Cook said.
On the flip side, as a chain owned by a corporate giant like Darden, when Chuy's expands its footprint it will face stiff competition from independent full-service Mexican restaurants in this fragmented ethnic dining sector.
"We cannot discount the independent market," Tristano said. "We have a lot of Mexican restaurants that are run by mom-and-pops that are Hispanic that certainly do well. So it adds more fuel to the fire. The authenticity that you get from a lot of these Mexican independent restaurants is very good, very strong. ... And I think what you're seeing now is that there's probably a little bit more trade-off than I think this segment would like, meaning people aren't always going to the same place. They're going to different places, and that can cause problems."
Larson described the proposed Chuy's purchase as "kind of interesting because you haven't really heard much" about the chain.
"What is so innovative about their restaurant that's different than a local Mexican restaurant?" she told CoStar News.
Darden is looking to expand its market share and brick-and-mortar footprint by buying Chuy's, according to Anjee Solanki, national director of retail services at Colliers. And if a Chuy's restaurant underperforms in a market, Darden can swap one of its other concepts, like an Olive Garden, into that space, Solanki told CoStar News.
Darden has grown by making acquisitions, for example, purchasing the fine-dining chain Ruth's Chris Steak House for roughly $715 million last year.
As opposed to corporate restaurants, local Mexican eateries are getting a boost from social media, with influencers recommending authentic Mexican-owned restaurants, according to Larson. And Americans have become more discerning about Mexican cuisine, as they have with Asian food, Larson said.