Cover Story

A fresh perspective

By Leslie Stevens-Huffman

The Pittard file

When Dan Pittard became president and CEO of Rubio’s Restaurants Inc., the operator of Rubio’s Fresh Mexican Grill, in August 2006, he immediately examined its business strategy and targeted market niche.

Pittard, who was brought in to fix the company’s faltering expansion efforts, first learned about the importance of strategy at Harvard Business School, and later as a partner at McKinsey & Co., where he helped consumer companies develop profitable growth plans.

Now, he needed to fix a restaurant chain that had a lot of potential, but was lacking in direction.

“I really liked the food,” Pittard says. “But I thought that the strategy was not the best strategy. Our competition is cheap, and I knew the economics of the situation. As a small company, we aren’t going to win a price war. We needed to shift our strategy.”

Initially, Rubio’s Fresh Mexican Grill appeared to be one company that was capable of growing beyond its founder-led era with ease. The company started as a single taco stand in Mission Beach, Calif., in 1983, went public in 1999 and reported net income of more than $3 million in 2004. But sometimes the best strategy for a small founder-led organization won’t continue to be the right plan to take a company through a heavy growth phase and beyond. After expanding to more than 160 locations, Rubio’s profitability waned, and subsequently, the company reported a loss for fiscal year 2005.

Enter Pittard, who besides his experience at McKinsey & Co., also had been a senior executive with Frito-Lay where he helped roll out Taco Bell products into supermarkets. He accepted the assignment and the challenge knowing that Rubio’s had more than $10 million in the bank and a board that was supportive of his ideas to shift the company’s strategy and everything that supported it.

Designing the strategy

The basis of any strategy is an idea. “To design a strategy, you have to start with a hypothesis,” Pittard says. “In this case, the hypothesis was that Rubio’s appealed to more upscale clientele who would be willing to spend more than $5 for a meal. You have to use data and conduct market research to validate your hypothesis and then set a strategy.”

Pittard purchased publicly available data and conducted market research on existing and prospective customers to validate his hypothesis.

“You want to get the best facts that you can, but usually getting all of the available data is too expensive, so you get some data and then make your decisions,” Pittard says. “That’s what you get paid for as the CEO is to use your best judgment. When Ted Turner started CNN, he bet on a hunch because there probably wasn’t enough available data to support the notion of a full-time news network. That’s often the case in entrepreneurial ventures, but if you have an established marketplace, there’s usually some data to look at.”

The data helped Pittard focus his efforts on reaching the most appropriate target market to produce a profit, but he also weighed the company’s competitive position and its economics structure in developing his strategy and validating his decision.

“As you conduct your market research, you really want to have it become clear in your mind who your customer is,” Pittard says. “Are you going to position for a cost advantage in the marketplace or with a superior product? It’s hard to do both so you have to decide. There have been very few companies that managed to position as both a value leader and a low-cost leader. Google comes to mind as an exception in the technology industry, but there are few companies that have managed to accomplish that.

“It became clear to me that we just weren’t structured to compete on price, and we had been failing trying to go down that path. Given our size, I thought we were much better structured to compete on value.”

Once you’ve selected your target market segment and defined your value proposition, you want to apply the economics to understand the amount of market share you have to garner to be profitable. In Rubio’s case, Pittard calculated a good return could be provided to shareholders if the company generates between $500 million and $1 billion in annual revenue — compared to the $152.3 million it generated in fiscal 2006.

To fully understand the economics and to validate his niche-player strategy, Pittard not only looked at Rubio’s cost structure, but that of its competitors.

“You need to understand the cost structure of your competitors to successfully position yourself in the marketplace,” Pittard says. “We conducted some limited reverse engineering of everything, including our competitor’s cost structures and their products, so we could understand the cost of the ingredients. We also conducted some mystery shopping to understand who their customers are. In this case, for example, we knew that Taco Bell targets an age range of 14 to 22 and their positioning is around low cost, so our skew is toward a higher income, higher education and more health-conscious customer. Having market data and a knowledge of the competition are both essential in validating your strategy.”

Align the function to the strategy

Pittard says that after conducting research and authoring a strategy, CEOs must implement their plan. To do that successfully, he advocates aligning resources and all of the company’s functions to support the strategy.

“We added 20 people to our food and beverage department, which is the equivalent of the R&D function in most businesses,” Pittard says. “Since we wanted to position ourselves within the targeted market as a value leader, it’s important to invest in developing a product that will support the strategy.”

While spending more money on new product development, Pittard found some savings by reducing advertising costs and then realigning marketing expenditures to garner share within the targeted marketplace.

“It’s a fairly simple back-of-the-envelope type of exercise to look at your return on advertising,” Pittard says. “You simply have to look at the contribution dollars you are spending and what type of lift you need to get to increase brand awareness to see if it’s cost-effective.

“In our case, because we don’t have a huge distribution of stores and because we don’t compete on price, the radio advertising we were doing didn’t make sense because we couldn’t drive enough of the right customers into our locations to justify the expense. We decided to realign our advertising dollars toward local store efforts and local marketing events. To accomplish our goals, we hired local marketing representatives who go out and call on the area businesses. This supports our strategy by taking us right into our targeted demographic, and it’s more cost-effective. We’re also building an online ordering capability, which will enhance our ability to develop the lunchtime business meeting market, which is part of our niche.”

As a way to check back on the soundness of his strategy and the execution, Pittard sets revenue benchmarks for each store and monitors the results.

“To execute a strategy, you need to set milestones for each year that measure your progress and agree as a team on the priorities,” Pittard says. “Then you make certain that the goals cascade down within the organization to all of the staff, align your functions and build on the company’s capabilities to deliver on the strategy, set benchmarks and check your progress.

“In our case, we set a goal of reaching 10 percent of sales in delivered food in each of our stores. This benchmark mirrors our progress toward increasing market share within the lunchtime meeting marketplace. I check on all the numbers each month to see how we’re progressing. You have to stay on top of the progress because if something changes you may need to adjust your strategy.”

Aligning human capital with the strategy

Another element of Pittard’s strategy is to improve Rubio’s profitability by reducing excess organizational capacity. Simply stated, the company has a corporate infrastructure to support more than 160 stores, which represents a fixed cost. More stores can be added without adding incremental costs, which will increase revenues. While some analysts have questioned his strategy and decision to expand given the company’s recent lack of profitability, Pittard maintains that it’s the right move because expansion absorbs excess capacity and drives profitability.

“If you look at our unit economics, we look very good,” Pittard says. “There’s a certain amount you have to pay to attract the caliber of general managers you need to manage the stores, and they can handle more stores. One of the changes that I’ve made is adjusting our compensation plan to better align with our strategies.”

In the past, the field management team was compensated on sales. Now, they are partially tied to sales as well as profits.

“I think that it’s best when the employees are encouraged to think like owners, and paying them like owners helps with that,” Pittard says. “Also, as a CEO, tying performance back to compensation forces you to look at the performance of your staff all across the organization and how that aligns with your strategy.”

In addition to calibrating his compensation to match his strategy, Pittard benchmarks and tracks service levels at the stores to assure that customers return frequently, and he’s developed and installed a staff training and career management program to retain front-line workers, which enhances the customer experience. Satisfied customers are repeat customers, and when they return, they increase sales and store profits through better leverage of marketing dollars and increased revenue-to-overhead ratios.

The quarterly numbers are another key indicator that Pittard can monitor to validate that his strategy, which emphasizes great taste over low price, is on target and garnering increased market share. For the third quarter, which ended Sept. 30, 2007, revenue rose 13.5 percent over the same period in the prior year to $44 million, which was the highest quarterly revenue Rubio’s has reported since going public in 1999. Net income also increased 22 percent to $732,000, from $600,000 for the same quarter last year.

“As we continue to grow with our existing infrastructure and build our capabilities toward executing our strategy, our (general and administrative expense) as a percent to sales decreases, which will improve our profitability,” Pittard says. “But no matter how good the strategy, you have to get the product right, and you have to price it right to be successful. It’s not enough to do it once. You have to make it right over and over again hundreds of time each week because at the end of the day in the customer’s mind, you’re only as good as their last visit.”

HOW TO REACH: Rubio’s Restaurants Inc., www.rubios.com