Growth on the horizon for Rusty Taco, Tropical Smoothie owners
Illustration by Jonathan Hankin
Quick, name the 12th largest “community” in Virginia. Hint: It’s where franchisees Chris Carabell and Kevin Donham opened their first Rusty Taco last fall. OK, I won’t torture you any longer; it’s Midlothian (population 35,000-plus), an affluent and unincorporated village west of Richmond.
Their taco joint is also in the same center, Westchester Commons, where they operate their third-most profitable Buffalo Wild Wings. They’ve been in the sports bar system for nearly 20 years, ever since Carabell’s mother, Marnie, launched the franchise. It has since grown to nine restaurants. Rusty Taco, however, is a separate business, Carabell was quick to point out, though both he and Donham are overseeing its growth.
Buffalo Wild Wings, now a subsidiary of Inspire Brands, bought a stake in what was then R Taco in 2014. Inspire Brands changed the brand’s name back to its original moniker (after the late founder Rusty Fenton) after buying it in 2018. The Midlothian restaurant is the Dallas-based chain’s 33rd outpost.
Carabell, who left the corporate world after 30 years, is diving into entrepreneurial activities— such as working with Rusty Taco and Buffalo Wild Wings. He is also active in real estate, though unconnected to the restaurants.
Carabell recalled for me that he and Donham considered franchising with Rusty Taco a few years ago, traveling to Dallas to take a closer look. Inspire Brands’ involvement convinced them to take the plunge.
“We like the story now. We are ready to go,” Carabell said during our January phone interview, adding the pair has agreed to open three units in greater Richmond.
I asked Carabell what lessons he’d so far gleaned from the fast-casual taqueria. “It is far simpler to manage than a Buffalo Wild Wings,” he said. “We had no problem recruiting and retaining employees. They like to work at Rusty Taco.” For one thing, he added, the closing hours are better.
Yet it is also a business that requires special attention. “This is a concept where you have to watch your pennies and nickels very carefully,” Carabell noted. “You can’t go into a space and pay $40 or $50 a square foot and think you’re going to make money.”
The partners have also learned that street tacos are somewhat unfamiliar in Richmond. Guest feedback has showed that customers like the food but expect to be served hard-shell tacos. “Where’s the rice and ground beef?” Carabell said, repeating a question that employees have often been asked. “That’s been a challenge.” The restaurant’s menu advertises “Street tacos served on corn tortillas.”
Sales, moreover, dropped when the area’s weather turned colder. “We came out of the box with tremendous sales, and then it pulled back,” he explained. “When weather is cold, we have to close the garage door. It’s a pretty seasonal business.”
Carabell and Donham paid cash to open their first Rusty Taco, some coming from their first outside investor. “A friend of mine,” Carabell told me. He estimated the cost to open a Rusty Taco falls between $700,000 and $900,000. The brand’s FDD, meanwhile, lists a total investment range of $529,817 to $796,325. Annual sales should settle between $1.2 million and $1.5 million, Carabell predicted. He expects to use bank financing for the second unit, the location of which has yet to be determined.
Ask Glen Johnson what his biggest challenge is, and like many growth-oriented franchisees it boils down to capital needs and how quickly he’s able to open units. His goal, shared by franchise partner Nick Crouch, is 100 Tropical Smoothie Cafes by the end of 2022.
As of late January, the men and co-CEOs operated 60 Tropical Smoothies among five southern states. Five more outposts are in development within the framework of DYNE Hospitality Group, their Little Rock, Arkansas-based company. The pair formed it in 2017—Crouch overseeing operations, Johnson handling financials—after each had separately developed more than a dozen units.
“Right now,” Johnson told me, their primary sources of funding are bank loans and cash flow. “We are looking at different options, but those two sources have worked great for us so far.”
Other options include private equity, angel investors and family offices. (Johnson, in fact, alluded to a family office that has a stake in the company.) “Our discussions are around whether it is worth it to grow through private equity. You are diluting ownership, but getting more capital means growing more quickly,” Johnson said.
So far Johnson and Crouch have declined offers, which have been for a minority share of the company. “The ones we’ve talked to have said, ‘You guys have a proven business model. We just want to help you amplify that,’” Johnson explained.
The question Johnson and Crouch are asking themselves is whether to wait for an economic downtown to dilute their ownership, hoping that rents will tumble.
Growth, meanwhile, hasn’t come without hitches—particularly when the partners have been looking for endcaps. Tropical Smoothie’s footprint, after all, is a mere 1,500 square feet. When an endcap is available with a drive-thru, landlords often prefer to rent to brands needing 2,000- to 3,000 square feet, Johnson said.
The brand doesn’t need much dirt, either, only about half an acre. Real estate deals fitting that model sometimes pop up in smaller markets. Johnson estimated land costs in those cases run from $300,000 to $600,000. Opening a Tropical Smoothie Cafe, he pointed out, adds another $250,000 to $450,000.
The partners have become real estate opportunists. “Sometimes we’re doing our own development deals where we own the real estate and lease from ourselves,” Johnson said.
“At other times we partner with a developer on the front end, and they will build a building for us and other tenants.”
David Farkas has covered the restaurant business for 25 years as a reporter and food writer, and writes about development deals in The Pipeline in each issue. Send your franchise’s development agreements to him at firstname.lastname@example.org.