Although they don't use the word "comeback," Taco Del Mar is recovering from some mistakes made in the1990s. The company recently opened two units in Canada, signed on some new franchisees, and signed a co-branding agreement with the Skippers seafood chain.

This is an improvement over a few years ago, when the Seattle-based chain reportedly almost went bankrupt. Taco Del Mar fell short of its goals of expanding to 75 units by the end of 2002, and opening 60 stores in Canada. The company even had to close a few locations, including a high-profile failure in Boston.

Even with these setbacks, company co-founder and president James Schmidt remains optimistic. Things are different now, he says. The 11-year-old company is now leaner and more efficient. Schmidt transformed the chain from a 300-employee, corporate entity to an entrepreneurial, franchise-driven company with 10 employees. "As you get bigger, you get more management layers, and it eats up all your profits. I used to have vice presidents of operations, district managers and store managers," says Schmidt.

Today all but one of the chain's 72 units are franchises. Schmidt insists the company sold some locations as a strategic, not desperate measure. "We used to own a lot of stores," he says. "We sold those off to franchisees. That allows us to concentrate on a franchise model."

That franchise model, says Schmidt, will allow the company to expand in new markets, including Canada, and avoid the problems the chain endured in the past.

HOW IT BEGAN
In 1992, Schmidt and his brother John decided to go into the restaurant business. James' background was in marketing computers. John had worked as a manager in a Seattle seafood restaurant. Both brothers saw opportunity in the quick-casual burrito/taco segment.

Unfortunately, neither knew much about how to prepare Mexican food or its West-Coast cousin, surf food.

James splurged for some cookbooks by Diana Kennedy, the best-selling author of The Cuisines of Mexico, Mexican Regional Cooking, The Tortilla Book, and other cookbooks. Although her recipes for fried pumpkin, Yucatecan pickled lima beans, and Sinaloan shredded beef never made it onto the Taco del Mar menu, Schmidt says he was inspired by Kennedy's books and her personality. "I had the opportunity to meet her before I started Taco del Mar. She is a friend of my aunt," he says.

Like everyone else launching a Mexican quick-serve chain in the 1990s, Schmidt didn't want serve the same stereotypical American-Mexican food. He stayed away from the sombreros and mariachi, and opted for a Baja fishing/surfing theme, serving a variation of Mission (San Francisco) style burritos. Today, the chicken super burrito (rice, refried or whole pinto or black beans, salsa, chicken, $5.25) is the best seller; the veggie super burrito (rice, beans, salsa, lettuce and guacamole, $4.75) is second.

Schmidt's early plans were modest: he would open one store each year. He says that he and his brother didn't have the $600,000 that some chains need for expansion, so they set up stores by creating a commissary system. Employees at each Taco del Mar location don't cook; they simply assemble the ingredients that come in from vendors.

The commissary system keeps prices low. Since Taco del Mar locations do not have grills or stoves, insurance and equipment costs are lower. The ticket average, at $6.25, is similar to other fresh Mexican chains.

Although the chain advertises the hugeness of its burritos ("Burritos so big you don't need a fork, you need a forklift"), it doesn't follow the we-make-everything-here pitch that other chains use. According to Schmidt, customers want speedy service. "Convenience is 50 percent of the decision at lunchtime," he says.

FRANCHISING
After the Schmidts opened a few stores, someone called to ask about franchising. Schmidt decided that would be a good idea; not only could he raise money quickly if he charged people $130,000 to $150,000 to open Taco del Mar locations, but people who had invested their life savings would likely run a restaurant as if it were their own.

"He (the caller) opened his store, and it was always doing better than my 29 company stores," Schmidt remembers. "I wasn't standing behind the cash registers any more, but franchisees did. Their customer service was better, stores were cleaner, they had a lot less headaches. I thought, 'there's something to this franchise model that I like.'"

So Schmidt and his brother-who today is a shareholder but no longer involved in the day-to-day operations of the chain-opened opportunities to franchisees. Things went well: they opened more stores, and the Cali-Mex category, which includes Taco del Mar, gained popularity.

Then came the Boston fiasco. In 1997, Taco del Mar opened three company-owned stores in Boston, far from the customers, vendors, and real estate people the Schmidts knew in Seattle. Two years later, the Boston stores shuttered. The Puget Sound Business Journal called the Boston stores "an ill-fated expansion attempt" and reported that the chain "nearly went bankrupt."

Lance Jensen, Taco del Mar's first master license holder in the U.S., shrugs off the criticism. "Give Boston a rest," he says. "James had said this could be a great market for them, but they lost focus as a company. They came back from Boston, which did not work out for them, and refocused on what their business was."

THE FUTURE
Jensen, a former Dairy Queen franchisee, is also optimistic about the chain's rebound. He joined Taco del Mar when he headed the Seattle office of FranNet, a consulting company that matches franchisors with people who want to buy a franchise. When introducing a client to Taco del Mar, Jensen decided he liked the personality and the philosophy of the chain.

"On one end of the company- philosophy spectrum are companies that say, 'If I take advantage of my franchisees, I can make a little more money today,'" Jensen adds. "On the opposite end of the spectrum are companies that say, 'If I take good care of my franchisees, they will take care of me.'" He believed Taco del Mar fell in the latter category, and he joined in July.

The company hopes to avoid the Boston problems by opening franchise locations, not corporate units. The new strategy involves selling master development agreements in which a master developer recruits store owners in a territory. Jensen, for example, handles the Oregon and Clark County, Wash., territory. The parent company saves money by not having to hire area representatives who sell franchises. Instead, master franchisees handle that responsibility and share the royalties.

Taco del Mar can be an attractive option for franchisees who want to get into the Mexican restaurant business, but don't have the money for a Qdoba or La Salsa location. According to the Washington D.C.-based International Franchise Association, a franchisee for Qdoba would need to make an initial investment of $325,000 to $400,000 for one unit of a multi-unit deal. If the franchisee wanted a La Salsa restaurant, they'd have to invest $350,000 to $450,000. In contrast, a Taco del Mar franchisee would only have to invest about $130,000 to $150,000.

Canada is a new territory for Taco del Mar. Schmidt says that Canada is, after all, a foreign country. He had to quickly learn about exchange rates, bilingual packaging, and trade regulations. "NAFTA isn't as free as we might think," he laments. "There are taxes, and different people have to handle the product. Sysco gets it, gives it to brokers, and the broker gives it back in a Canadian Sysco truck. It's owned by the same company, but it's a separate division within Sysco. There are so many regulations."

In September, the chain signed master developers in Utah, Idaho, and Arizona. In October Taco del Mar opened two locations in Canada-in Langley and Richmond, British Columbia-and began construction on a unit in Squamish (also in B.C.). The 1,200-square-foot stores offer the same menu as the American stores.

The chain also plans to open co-branded units with Skippers Seafood and Chowder House, an Edmonds, Wash.-based seafood chain. The first co-branded location opened in Eugene, Ore., in August. "They need to get a younger group through their doors, and we need to expand outside of the markets we are in, and in smaller markets it is nice to do co-brands to spread the risk of start up cost," Schmidt says.

Jensen and Schmidt both think there's plenty of room for more Mexican restaurants in the U.S. and Canada. Schmidt likens it to the sandwich segment. "They are opening Quizno's and Subways left and right. How many sandwich stores do we need?" he asks.

"I do not think Mexican food is anywhere near saturation," Jensen agrees. "The chains that do a good job of developing, and the franchisors that develop a good market niche are going to rise to the top."