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Chi-Chi's becomes tougher sell

Hepatitis outbreak only the latest of woes as chain awaits a buyer

The hepatitis A outbreak linked to a Chi-Chi's restaurant in the Pittsburgh area hasn't left the restaurant chain looking too well itself.

With fewer than half the restaurants it had in its best days and a parent company more than $100 million in debt, Chi-Chi's Inc. was in bankruptcy and headed for the auction block even before the outbreak.

Parent company Prandium, of Irvine, Calif., said last month that it was working out a sale of Chi-Chi's, but that hadn't materialized before the outbreak. Now Chi-Chi's must find a buyer while burdened by an image problem that, the company says, has damaged sales systemwide.

"It's going to be a tough sell," said Ron Paul, president of restaurant consultants Technomic Inc. "It's definitely going to reduce the value of the company."

It's a dim prospect for what once was a star among Louisville-based restaurant chains. Long before Yum! Brands and Papa John's, Chi-Chi's was a national player in the restaurant business with its low-priced Mexican food and signature margaritas.

A year after getting its start in Minneapolis, Chi-Chi's moved its headquarters to Louisville in 1977 with a former KFC executive in charge. Among its earliest franchisees were Rally's and Long John Silver's developer Jim Patterson and a Midwesterner named Frank Carney, who had recently sold a pizza business he had co-founded for $310 million.

"When Frank Carney sold Pizza Hut, the first call he made was to Chi-Chi's," said Jack Butorac, a veteran Louisville restaurant executive and former Chi-Chi's vice president. "We didn't have anything open for him. We let him buy into one of our (existing) franchisees."

Mexican food was catching on and Chi-Chi's supplemented its popular menu with a booming bar business.

"It took Mexican food and really put in full-service quality with fast-food pricing," Butorac said. "You got a lot of food for a reasonable price. And there were the margaritas."

At its peak Chi-Chi's was billed as the largest Mexican restaurant chain east of the Mississippi. It had 200 employees in Louisville and more than 230 restaurants in its system.

Eventually the owners bought back many of the franchises in stock deals. In 1988 they sold the company for $235 million to Foodmaker Inc., the California interests behind Jack-in-the-Box restaurants and other, smaller concepts.

Foodmaker's managers were described as "fitness addicts" in news stories at the time. Butorac, who left Chi-Chi's two years before the sale, blames them for creating the first serious hitch in the Chi-Chi's stride.

"They tried to convert it to a California concept," Butorac said. "In two years they lost 55 percent of their sales doing menu changes. It was a huge strategic error."

In 1993, Foodmaker sold a two-thirds interest in Chi-Chi's and its other concepts for $270 million and combined with the bankrupt Restaurant Enterprise Group to form Family Restaurants Inc., which included the El Torito Mexican restaurant chain.

Chi-Chi's rallied and was named Mexican restaurant chain of the year by Restaurants and Institutions magazine three times running from 1993 to 1995. Still, debt burdened the company, Butorac said. Foodmaker had taken cash from the Chi-Chi's division and borrowed against its real estate to finance the 1988 purchase. In 1996, a corporate restructuring eliminated two-thirds of the jobs at Chi-Chi's Louisville divisional headquarters.

Two years later, Family Restaurants merged with the Koo Koo Roo chain of California chicken restaurants and eventually changed its name to Prandium. In 2000 Prandium sold off the El Torito restaurants, leaving only Chi-Chi's in its Mexican restaurant division.

But all the maneuvering ultimately did little to help Chi-Chi's face the growing competition from full-service Mexican restaurants, fast-casual outlets and Mexican-style offerings showing up on the menus of large, well-financed, full-service chains.

In July 2002, Prandium arranged new financing through a pre-packaged bankruptcy and soldiered on. A proposal to sell the company and all its restaurants last summer for $6.4 million fell through. Prandium lost nearly $4.8 million in the second quarter of this year and has sold off or closed Chi-Chi's restaurants in many markets, including Louisville.

Prandium was working on a deal with entertainment promoter Jack Utsick and his Worldwide Entertainment to buy Chi-Chi's, but that didn't happen before the hepatitis outbreak. Utsick referred questions about the deal to his lawyer, who was unavailable for comment.

Prandium has issued no statements on the matter.

Butorac said it was his understanding that the deal was off before the outbreak.

The hepatitis scare was a tough break that could have happened to any restaurant concept, Butorac said, but "people are going to put some kind of label on Chi-Chi's" because of it and it will take time for the chain to restore public confidence.

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