El Pollo Loco 2016 Annual Report Download - page 17

chicken,andincreasingourfoodcosts.Foodpricesforanumberofourkeyingredientsescalatedmarkedlyatvariouspointsinfiscal2015and2014.Weather-
relatedissues,suchasfreezesanddrought,mayalsoleadtotemporaryspikesinthepricesofsomeingredients,suchasproduceandmeat.Anyincreaseinthe
pricesoftheingredientsmostcriticaltoourmenu,suchaschicken,corn,cheese,avocados,beans,rice,andtomatoes,couldadverselyaffectouroperatingresults.
Alternatively,intheeventofcostincreaseswithrespecttooneormoreofourrawingredients,wemightchoosetotemporarilysuspendservingmenuitems,such
asguacamoleoroneormoreofoursalsas,ratherthanpaytheincreasedcost.Anysuchchangestoouravailablemenucouldnegativelyimpactourrestaurant
traffic,business,andcomparablerestaurantsalesduringtheshortageandthereafter.
Ourprincipalfoodproductischicken.Infiscal2015,2014,and2013,thecostofchickenincludedinourproductcostwasapproximately13.4%,12.6%,and
13.0%,respectively,ofourrevenuefromcompany-operatedrestaurants.Materialincreasesinthecostofchickencouldmateriallyandadverselyaffectour
business,operatingresults,andfinancialcondition.Changesinthecostofchickencanresultfromanumberoffactors,includingseasonality,increasesinthecost
ofgrain,disease,andotherfactorsthataffectdomesticandinternationalsupplyofanddemandforchickenproducts.Amajordriverofthepriceofcorn,whichis
theprimaryfeedsourceforchicken,hasbeentheincreasingdemandforcornbytheethanolindustryasanalternativefuelsource,asmostethanolplantsinthe
UnitedStatesprimarilyusecorntomakeethanol.Thisincreaseddemandonthenation’scorncrophashadandmaycontinuetohaveanunfavorableimpacton
chickenprices.Weoccasionallyaskoursupplierstousefuturescontractsorotherfinancialriskmanagementstrategiestoreducepotentialpricefluctuationsinthe
costofchickenandothercommodities.Wehaveimplementedmenupriceincreasesinthepasttosignificantlyoffsetincreasedchickenprices,duetocompetitive
pressuresandcompressedprofitmargins.Wemaynotbeabletooffsetalloranyportionofincreasedfoodandsupplycoststhroughhighermenupricesinthe
future.Ifweimplementfurthermenupriceincreasesinthefuturetoprotectourmargins,averagechecksizeandrestauranttrafficcouldbemateriallyandadversely
affected,atbothcompany-operatedandfranchisedrestaurants.
Negative publicity could reduce sales at some or all of our restaurants.
Weare,fromtimetotime,facedwithnegativepublicityatoneormoreofourrestaurantsrelatingto(i)foodquality;(ii)thesafety,sanitation,andwelfareof
chicken,whichisourprincipalfoodproduct;(iii)restaurantfacilities;(iv)customercomplaintsorlitigationallegingillnessorinjury;(v)healthinspectionscores;
(vi)integrityofouroroursuppliers’foodprocessingandotherpolicies,practices,andprocedures;(vii)employeerelationships;or(viii)othermatters.Negative
publicitycanadverselyaffectus,regardlessofwhetheranallegationisvalidorwhetherweareheldtoberesponsible.Inaddition,thenegativeimpactofadverse
publicityrelatingtoonerestaurantmayextendfarbeyondtherestaurantinvolvedtoaffectsomeorallofourotherrestaurants,includingourfranchisedrestaurants.
Theriskofnegativepublicityisparticularlygreatwithrespecttoourfranchisedrestaurants,becausewearelimitedinthemannerinwhichwecanregulatethem,
especiallyonareal-timebasis.Asimilarriskexistswithrespecttofoodservicebusinessesunrelatedtous,ifcustomersmistakenlyassociatethoseunrelated
businesseswithouroperations.Employeeclaimsagainstusorourfranchiseesbasedon,amongotherthings,wageandhourviolations,discrimination,harassment,
orwrongfulterminationmayalsocreatenotonlylegalandfinancialliabilitybutnegativepublicitythatcouldadverselyaffectusanddivertourfinancialand
managementresourcesthatcouldotherwisebeusedtobenefitthefutureperformanceofouroperations.Thesetypesofemployeeclaimscouldalsobeasserted
againstus,onaco-employertheory,byemployeesofourfranchisees.Asignificantincreaseinthenumberoftheseclaims,oranincreaseinthenumberof
successfulclaims,couldmateriallyandadverselyaffectourbusiness,financialcondition,resultsofoperations,andcashflows.
Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be met,
and our employees may not always act professionally, responsibly, and in our and our customers’ best interests. Any possible instances of food-borne illness
could reduce our restaurant sales.
Incidentsorreportsoffood-orwater-borneillnessorotherfoodsafetyissues,foodcontaminationortampering,employeehygieneorcleanlinessfailures,or
improperemployeeconductatourrestaurantscouldleadtoproductliabilityorotherclaims.Suchincidentsorreportscouldnegativelyaffectourbrandand
reputationaswellasourbusiness,revenues,andprofits.Similarincidentsorreportsoccurringatquick-servicerestaurantsunrelatedtouscouldlikewisecreate
negativepublicity,whichcouldnegativelyimpactconsumerbehaviortowardsus.
Wecannotguaranteethatourinternalcontrolsandtrainingwillbefullyeffectiveinpreventingallfood-borneillnesses.Furthermore,ourrelianceonthird-party
foodprocessorsmakesitdifficulttomonitorfoodsafetycompliance,andmayincreasetheriskthatafood-borneillnesswouldaffectmultiplelocationsratherthan
asinglerestaurant.Somefood-borneillnessincidentscouldbecausedbythird-partyfoodsuppliersandtransportersoutsideofourcontrol.Newillnessesresistant
toourcurrentprecautionsmaydevelopinthefuture,ordiseaseswithlongincubationperiodscouldarisethatcouldcauseclaimsorallegationsonaretroactive
basis.Oneormoreinstancesoffood-borneillnessinoneofourcompany-operatedorfranchisedrestaurantscouldnegativelyaffectsalesatallofourrestaurantsif
highlypublicized.Thisriskwouldexistevenifitwerelaterdeterminedthatanillnesshadbeenwronglyattributedtooneofourrestaurants.Anumberofother
restaurantchainshaveexperiencedincidentsrelatedtofood-borneillnessesthathavehadmaterialadverseimpactsontheiroperations,andwecannotguarantee
thatwecouldavoidasimilarimpactupontheoccurrenceofasimilar
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