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Cost cutting part of food companies' recipe for success

What do defense contractors have in common with food service companies? At one time or another, both industries have realized that the path to profits during tough economic times requires serious cost cutting. The aerospace and defense industries learned that lesson in the early 1990s and the food business is biting the bullet today.

Rubio's Restaurants (Nasdaq: RUBO) is a perfect example. The Carlsbad-based company started selling fish tacos and other Mexican food items in 1983 with a single shop in the Mission Bay area. After growing slowly in the San Diego County region for several years, the company initiated an aggressive growth plan that resulted in the opening of more stores throughout California, Arizona, Utah, Colorado, Nevada and Oregon.

However, tough times called for tough decisions at Rubio's. In its quarterly earnings report issued last week, the company announced revenues of $29.9 million in the previous three months, an increase of 12.4 percent over the previous quarter.

"I am very pleased with our financial performance for the first quarter," said Ralph Rubio, CEO and chairman. "We are now seeing the results of the earnings improvement initiatives we began last year."

Those initiatives included shutting down 11 under-performing stores and reigning in labor and food expenses. The bottom line was also enhanced by a 1.8 percent increase in same-store sales.

The rebound in earnings at Rubio's has been accompanied by a rebound in the stock price. After its initial public offering in May of 1999 at $10.50 a share, the stock price rose quickly to $15. However, the share price went into a steady decline and bottomed out at $2.75 at the end of last year. Recent trading has seen the price of Rubio's share climb to a 52-week high at $8.80.

Soon to join Rubio's on Wall Street will be Fresh Enterprises, the parent company for 157 Baja Fresh restaurants including nine in San Diego County. The company has filed an application for an initial public stock offering. No date for the IPO has been determined.

Rubio's and Baja Fresh are two of the companies trying to gain market share in the "quick casual" segment of the food services industry. These restaurants are a growing sector of the industry that is expected to generate record sales in 2002 at $407.8 billion. A cross between quick service and full service, these quick casual restaurants provide a variety of food products in a comfortable setting.

"Operators must evaluate every aspect of their concept, including menu, decor, service systems, and trade dress, in order to provide a positive sensory experience," said Ron Paul, president of Technomics, a food service consulting company.

The challenge for these food establishments will be to pry people away from their fast food fixes. The battle for market share among the hamburger heavies is getting heated. A new report from Technomics finds that chains like Wendy's (NYSE: WEN) and Jack in the Box (NYSE: JBX) are taking a bite out of the market that has historically been controlled by McDonald's (NYSE: MCD) and Burger King.

Wendy's has seen its market share rise for five consecutive years. The company founded by the late Dave Thomas now owns a 13.2 percent share of the fast food market, ranking behind McDonald's (43 percent) and Burger King (18.4 percent). The top two have seen their market share decline in the past year.

Also gaining share in the market place is San Diego-based Jack in the Box, the nation's fourth-largest hamburger chain with 4.6 percent of the market, up from 4.4 percent in 2000.

Wendy's and Jack in the Box have gained market share by thinking outside of the box.

"At Wendy's, sales of our new Garden Sensations salads are robust and meeting our expectations," said Jack Schuessler, CEO of the chain of 8,200 restaurants. "Customers like the quality and freshness of the ingredients, the new packaging, the variety of toppings and the fact that they can customize the salads." The products are quite a diversion from the pre-packaged image of the fast food industry.

Meanwhile, Jack in the Box is anticipating modest growth in sales for the rest of the year as consumers look for food values.

"During the fourth quarter, we will roll out a significant new quality-improvement initiative for our sandwich line," said Robert Nugent, who heads up the chain of 1,800 company-owned or franchised restaurants. "And throughout the remainder of the year, we will continue to provide and promote strong value offerings for our customers, who have been particularly affected by this economy."

Nugent is referencing the impact of the September terrorist attacks on consumers and the restaurant industry. Recent reports that suggest personal income is on the rise could be the perfect recipe for the food business.

"As an industry in which a large portion of the growth is driven by cash on hand, the projected growth in disposable personal income suggests continued gains in the restaurant industry in 2002," said Bruce Grindy, senior economist for the National Restaurant Association.

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Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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