Pancho’s Mexican Buffet, Inc.

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Pancho’s Mexican Buffet, Inc.

3500 Noble Avenue
Fort Worth, Texas 76111-0407
U.S.A.
Telephone: (817) 831-0081
Fax: (817) 838-1480
Web site: http://www.panchosmexicanbuffet.com

Public Company
Incorporated: 1968, in Delaware
Employees: 2,001
Sales: $56 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: PAMX
NAIC: 722211 Limited-Service Restaurants

Pancho’s Mexican Buffet, Inc., based in Fort Worth, Texas, owns and operates 47 restaurants, principally in Texas, but also in Arizona, Louisiana, New Mexico, and Oklahoma. It is the only publicly owned company offering Tex-Mex food served in a cafeteria-style, all-you-can-eat buffet. It offers sit-down table service for customers after they have gone through its restaurants’ service lines, and it also provides take-out service. Recently, in an attempt to bolster its sales, Pancho’s started converting some of its units into a new, upscale restaurant format dubbed Pancho’s Buffet & Grill, featuring an expanded menu, newly refurbished and redecorated interiors, and kitchens open to public view. It also introduced a scaled-down version of its traditional restaurants named Pancho’s Express Buffet, offering fewer food choices and smaller portions at a quicker service pace and lower prices. Costs at these were cut by replacing the labor-intensive serving lines with a self-service operation. Additionally, it converted a few of its regular restaurants into self-service units and scaled-down its prices. In the spring of 2001, the company completed plans to merge Pancho’s Restaurants, Inc., into an affiliate of Stephen Oyster. That step did not involve any immediate changes in the company’s operations.

Jesse Arrambide, Jr., Turns Family Business into a Chain

Jesse Arrambide, Jr., founded the first of the company’s restaurants in El Paso, Texas. Arrambidie learned to make Mexican specialities-tamales, enchiladas, and tacos—from his mother, but he also learned the art of “commodity” or large-quantity cooking while serving onboard a naval troopship in World War II. Years later, he put what he learned to good use, starting first in 1958, when he began using the commodity cooking technique in Pancho’s, his family’s El Paso bar. Offering a selection of a few Mexican staples served buffet style, Arrambide was soon drawing a dining crowd, and in a few years his success encouraged him to start up a new restaurant chain.

In the 1970s, Pancho’s introduced two full-service restaurant concepts that it later abandoned. The first was a seafood restaurant dubbed Spanish Galleon and opened as a three-unit mini chain. The other, like Pancho’s traditional restaurants, was a Mexican eatery named Emiliano’ s, which never grew larger than two units.

In was not until 1979 that Pancho’s failed to turn a profit for the first time. At that juncture, founder Arrambide elected to turn over the chain’s operating reins to president Hollis Taylor, who became the company’s CEO. Although he was a topnotch restaurateur, Arrambide knew that other skills were needed to direct the company and that his hands-on, personal style of running things was no longer appropriate. Taylor was his logical replacement because Taylor had the right credentials for the job-years of experience in finance and accounting.

Pancho’s Fares Well Despite 1980s Oil Industry Bust in Its Market Area

By 1982, Pancho’s had grown into a chain of 28 restaurants, some located outside of Texas, although the company’s epicenter remained there. Over the next five years, the chain would increase to 45, which included the conversion of its Spanish Galleon and Emiliano’s restaurants into Pancho’s.

The company simply fared well during the 1980s. In fact, unlike most restaurant chains with their business locus squarely in the oil patch, Pancho’s was turning a good profit. Only Dallas-based Chili’s seemed to be keeping pace with it. In 1986, the chain earned $2.5 million, up 33 percent from the previous year. In the same period, its total sales jumped to $43.1 million, up from $36 million in 1985, almost a 20 percent increase. And that was at a time when oil prices were collapsing and driving the company’s market area into a serious recession.

In part, Pancho’s survived the oil industry debacle of the mid-1980s because of its pricing strategies. In 1987, Pancho’s all-you-can-eat buffet was still just $3.99, which, considering the quantity and variety of food available to customers, was a solid bargain. Children between 6 and 11 ate for half price, and those under 6 ate free. The average lunch ticket totaled just $4, and the average dinner ticket just $4.50. However, bargain meal prices do not tell the whole success story. Taylor and his management team played a vital role, both by improving operational margins and accelerating the company’s expansion. By 1987, the company was adding about a dozen units a year and hoped to double its size by 1990, staying mostly within its four-state market-Texas, Louisiana, New Mexico, and Arizona-but also venturing into Oklahoma.

Rapid Expansion Leads to Problems and Strategies in the 1990s

In the new decade of the 1990s, Pancho’s found the financial road a little rockier than it had been in the mid-1980s. The company took a reported loss of $3.5 million in 1991, principally arising from its aborted attempt to open three new units in Colorado and, also, its adoption of a different workmen’s compensation plan. More troubling was the fact that sales were stagnating. In fiscal 1992, although the company returned to profitability, its revenues, $73.1 million, were slightly down from the previous year’s $73.6 million. In order to boost sales, in 1993 Pancho’s planned to begin increasing the number of its all-you-can eat cafeteria-style restaurants at an annual rate of 10 percent. It would prove to be a more ambitious plan than circumstances would allow.

Also in 1993, Pancho’s founder, Jesse Arrambide, Jr., died. He was succeeded as the company’s chairman by his son, Jesse Arrambide III, who inherited the chain’s growing problems. Pancho’s rapid expansion brought with it new and persistent bottom-line problems, compelling the company to cut back by closing down several unprofitable units. It total number of restaurants in 1994 was 77, but that figure dropped to 70 in 1995. Still, Pancho’s continued to open new units up until the third quarter of its fiscal 1995 year, when its losses for the first 9 months had reached $6.07 million. While it had closed some units during that period, it had also opened three new ones in the Texas cities of Galveston, Pasadena, and Baytown, and it was on the verge of opening another in Guadalajara, Mexico, but the disappointing fiscal situation brought a temporary moratorium on further expansion. Of the 70 units remaining open at the end of 1995, 66 were company owned and the remaining four were franchises.

Between 1993 and 1996, the company took some strategic steps designed to improve its efficiency and enhance customer appeal. For one thing, in 1994, it entered into a distribution service agreement with SYGMA Network Inc. Pancho’s determined that SYGMA, a unit of Sysco Corp. specializing in distributing foods and supplies for restaurant chains, would both increase delivery frequency and reduce Pancho’s distribution costs. The agreement also held the promise of facilitating the distribution of necessities to future Pancho’s restaurants located outside its existing network. Despite this change, the rising cost of food compelled the company to raise its own prices somewhat, from $4.69 at lunch and $4.99 at dinner to $4.99 for both lunch and dinner on week days and $5.49 on weekends. To offset the negative impact of its increased prices, the company used an aggressive advertising campaign centered on its unique “raise the flag” method of calling for table service. Although all customers went through the cafeteria-style buffet line, once seated they could signal waitresses and waiters for second portions by holding up the small Mexican flags that adorned each table. The scheme had family-dinning appeal and, boosted by a 30-second television commercial, was for a time quite successful. In one period in 1994, it helped increase comparable-store sales by more than 92 percent. Pancho’s pushed the family eating idea in other ways as well, granting, for example, a senior-citizen discount of 20 percent and still allowing children under five to eat free.

Working to Develop New Strategies and Concepts

These measures stemmed but did not turn the tide, though, and net losses continued to plague Pancho’s. In 1996, the company lost $415,000 on sales of $71.5 million, and in the next year lost $4.71 million on sales of $67 million. However, the loss for the 1997 fiscal year included a pre-tax restructuring charge of $5.1 million. The charge resulted from the shut down costs involved in 11 restaurants and the cost of disentangling the company from its joint Mexican venture. The loss looked worse on paper than it was, and, in fact, in 1997 the average-restaurant sales figure improved to $1.12 million, which was slightly better that the figure from the previous year. However, the next year the picture turned gloomier. Pancho’s ended fiscal 1998 with a $12.5 million loss, despite the fact that it had a year-end earnings rise that resulted from the sale of some of its closed restaurant sites. The company’s poor stock performance–it was unable to sustain a market value over $5–also forced it to move from the NASDAQ National Market to the NASDAQ Small Cap Market. To prepare for the change, Pancho’s used a one-for-three reverse stock split so that it could build the value of its stock above the mandatory minimum trading price of $1 per share.

Company Perspectives:

Superior customer value is our mission at Pancho’s Mexican Buffet, Inc. We promise delicious Mexican food, wonderful service, and fun family dining. We employ, empower, and support great people to serve great people. We reward our stockholders with growth based on the loyalty we earn from our customers and fellow team members.

In 1998, Hollis Taylor indicated that in 1999 the company would try to further reduce its debt and develop new concept changes. Between 1996 and 1998, Pancho’s had reduced its debt service by 50 percent, bringing down its notes payable to $1.4 million. The net proceeds of $973,000 realized from the sale of two restaurants in October 1998 were primarily used to help pay down that debt. By 1999, the company could thus point with pride to its sound financial condition in addition to its good record of promoting people based on performance, its annual allocation of funds to all its properties, its centralized accounting system, and its reporting requirements that allowed its 48 units a fair degree of autonomy.

2000 and Beyond

One new concept that emerged from planning strategies near the end of the century was Pancho’s Express Buffet. Early in 2000, Pancho’s announced plans to convert, within a year, four of its units in selected markets into new Pancho’s Express Buffet restaurants. Its aim, based on a pressing need to increase its customer base, was to broaden its appeal by reducing meal prices and speeding up its service. The concept, featuring a new logo and signage, a modified interior decor, and a smaller kitchen, was designed to establish a price point of $3.99 per person, $2 below that of its traditional restaurants. Pancho’s had tested the new format late in 1998, in Fort Worth, converting one of its established restaurants for the purpose. In 1999, without using any advertising to punch up its business, the unit increased its same-store sales by a very encouraging 30 percent over the previous year and set in motion the plan to convert additional selected units into the new format. It was a new basket into which Pancho’s was clearly planning to put more and more of its financial eggs.

To balance the Express Buffet with a pricier alternative, the company also began converting some of its units into a new, Pancho’s Buffet & Grill concept. These upscale restaurants offered an expanded buffet menu, with more specialty grill items and a salsa bar, as well as new decor and a new logo and signage. The new Express Buffet and Buffet & Grill concepts were rolled out as part of the company’s strategic efforts to regain the momentum it had lost in the industry over the latter part of the 1990s.

In 2001 Pancho’s was purchased by fast-food veteren Stephen Oyster. Oyster, who before buying the company held about 9.6 percent of its stock, paid approximately $7.35 million for the chain, purchasing outstanding shares at $5 each, about $1.50 higher than the market price then current. At the time of the buyout, Pancho’s chain consisted of 48 owned and operated restaurants in Texas, Arizona, Louisiana, New Mexico, and Oklahoma, just three more units than it had back in 1987. Whether the financial reorganization of Pancho’s would have any impact on its growth strategies or major changes in its operations remained to be seen.

Principal Subsidiaries

PAMEX of Texas Inc.; PMB Enterprise West Inc.; PMB INTL Inc.

Principal Competitors

El Chico Restaurants, Inc.; Luby’s, Inc.; Mexican Restaurants, Inc.; Prandium, Inc.; Taco Bell Corp.; Taco Cabana, Inc.

Key Dates:

1966:: Jesse Arrambide, Jr., opens Pancho’s first restaurant in El Paso, Texas.
1979:: Arrambide turns over operational control of company to Hollis Taylor.
1993:: Founder Arrambide dies; Jesse Arrambide III is named company’s chairman.
1994:: Company enters distribution agreement with SYGMA Network Inc.
1998:: Pancho’s tries out its first Pancho’s Express Buffet.
2000:: Company rolls out its new Pancho’s Buffet & Grill concept.
2001:: Company merges with Stephen Oyster affiliate Pancho’s Restaurants, Inc.