Two Pesos

Two Pesos, originally named Natcho’s, was a fast-casual Tex-Mex chain based in Houston. It closely resembled Taco Cabana and was later acquired by them. The origins of Two Pesos lie with Chi-Chi’s co-founder, Marno M. McDermott. After helping to grow the company, McDermott sold Chi-Chi’s franchise rights and began looking for his next venture. In early 1983, he was hired by Fuddruckers, which was preparing to franchise. In early 1985, McDermott resigned suddenly from Fuddruckers. McDermott, who had been the board’s chairman, sought a more involved role within the company’s management. However, the board had voted him down, and he suddenly quit. Around this time, McDermott would reunite with a franchisee from his Chi-Chi’s days, James E. Blacketer. Blacketer was a major franchisee of Chi-Chi’s in Oklahoma and had been trying to expand the concept into Texas with little success. Issues with the quality of food and non-authentic “Tex-Mex” were met with disdain, and laughs were to be had at the name, which McDermott claimed was his wife’s nickname. At a time when Hooters and Twin Peaks didn’t exist, Texans did not take these fake Chi-Chi’s seriously. They studied other chains and concepts and began developing ideas around Two Pesos. In preparation for the launch, Blacketer sold off his Chi-Chi locations, speeding up the chain’s demise in Texas. While the duo would state some of their influences, like adding picture windows to the tortilla-making area, from Fuddruckers windows to its “bakery,” no mention was ever made of Taco Cabana. Likely in a bid to avoid litigation, the co-founders felt it prudent to begin operations in Houston, a market free of Taco Cabana. With an idea and a market, the first location, then known as Natcho’s, opened in December 1985. This location would be the first of five, with others planned for OST and Main, Galveston, Richmond and Fondren, Kirby at the SW Freeway, and 1960 and 45—all locations considered relatively rich in hip eateries.

The name was changed to the familiar “Two Pesos” between Natcho’s grand opening and the opening of the second location. During Natcho’s/Two Pesos grand opening, Taco Cabana had become aware of what was happening and opened a location in Houston to stake their claim. Two Pesos would continue to open new locations against the single Taco Cabana. Two Pesos would do their best to support Houston and brand themselves as a local alternative to a San Antonio chain. However, it did not take long for direct comparisons to be made. At a point when Taco Cabana should have been focused on shutting down their imitators, internal struggles in the family-owned company would have led to a split that ended the connection between Taco Cabana and its location in Houston. This split chain, named Ta Casita, was still owned by members of the family behind Taco Cabana, and while they may have disagreed on franchising, they were on the same side about Two Pesos. With the time bought by the split, Two Pesos would step up their expansion rate. To do this, they would prepare to go public via a merger with an existing company. The company they would merge with was based in Minneapolis and named Span Corp. The company had no assets, just capital, and was close to what we consider a publicly traded private equity firm. Span Corp was helmed by investors, some of whom had a friendly relationship with Marno McDermott, and the group was looking for a vehicle to invest in. The Two Pesos chain had quite a bit going for them. They were doing great drive-thru business, had a decent $3 per order average for fast food, and had about a 90-second turnaround. This merger would also invite reporters to seek public comment from Taco Cabana on what they thought of Two Pesos, essentially ripping off their concept. While Taco Cabana was mum on their plans, it was obvious at this point they would not let Two Pesos stand for much longer.

Still, with Span Corp’s investment, the now cash-rich Two Pesos would accelerate expansion. From its first year, Two Pesos ballooned from three to 14 locations. Plans for expansion called for 21 stores in Houston and 16 in Dallas, where they already had two. Two Pesos had plans to hold company-operated stores along the sun-belt from Texas to Arizona but was working with franchises elsewhere. The company’s first franchised store had recently opened in Norfolk, VA, and a franchisee had signed up in Denver, and more were being sought for California and Florida. Two Pesos even teased that they had eyes on England in plans that would never proceed. While Two Pesos had their eyes on the prize, Taco Cabana had quietly filed suit against Two Pesos for essentially ripping off their concept. Two Pesos filed a countersuit claiming Taco Cabana was trying to limit competition. This legal matter would mostly be handled quietly behind the scenes, with Two Pesos continuing to open locations in new areas like Oklahoma City, Atlanta, and Minneapolis. While the lawsuit was quiet, the evidence against Two Pesos was damning. Taco Cabana alleged that Two Pesos had stolen information from them by stealing plans from a site under construction and buying info from employees. The similarities were striking, such as identical kitchen layouts and sizing, building similarities, and a few identical recipes. While Two Pesos would admit that Taco Cabana inspired them, they denied all other claims, especially the stolen plans, claiming that Marno McDermott had independently developed the ideas while running Chi-Chi’s and his first Mexican restaurant, Zapata. The jury would award Taco Cabana 1 million dollars, and the judge required changes to the layout of the Two Pesos. Shaken up by the judgment, McDermot would step down as chairman of Two Pesos, although he would retain ownership of his shares. The judgment would also slow most expansion, except for a few stores in Virginia. While the chain would begin making changes to their restaurants to continue operating, such as repainting stores, and adding wings to their menu, Two Pesos would appeal the verdict to the Supreme Court.

In 1990, after two years of continual losses, Marno McDermott returned to helm Two Pesos in an attempt to right the chain, which was still owned. Two Pesos had fallen from a height of 29 stores down to 25 across five states. One of McDermott’s tactics during this time was selling off franchising rights to formerly corporate-owned stores, specifically in Oklahoma and Arizona. After only two months back at the helm, McDermott stepped down again. This time, Houston restauranteur Ghulam Bombaywala, who had quickly been buying up cheap stock in the restaurant, stepped up to take control. Bombaywala, who had worked his way up from a busboy to the owner of multiple restaurants, had grand visions for Two Pesos. He had previously purchased the Marco’s chain, another drive-thru Mexican concept from Ninfa’s, and successfully turned that around. Two Pesos were planned for the first time since the bankruptcy, specifically in Sugar Land and Pasadena. While these exact new locations wouldn’t come to pass, under this new ownership, three new locations would be built in Texas (Rosenberg, College Station, and San Angelo), and franchise locations would be built in Tempe, AZ, and La Habra, CA. Bombaywala would also begin building locations in mall food courts and was widely praised for saving Two Pesos from complete destruction. While ambitious goals were being set for Two Pesos, not all would be reached, like building ten restaurants in California. One of the expansion issues was the difficulty in selling the concept beyond regions accepting of Tex-Mex. Bombaywala was also dealing with multiple retail-related purchases then, and Two Pesos began to take a back seat. Finally, the lawsuit, which had made its way to the Supreme Court, was finally settled with Two Pesos, losing the case and being forced to pay $3.7 Million in damages. In 1993, he quietly sold Two Pesos to Taco Cabana. While company-owned locations were almost immediately converted to Taco Cabana, some franchised Two Pesos locations continued to operate. In the case of the mall locations, TC would elect to close them, building free-standing locations outside of the mall where they felt it was appropriate. The final two pesos in business were in Tuscon, AZ, and closed sometime around 1999, putting a lid on the 15-year experiment and leaving a Tex-Mex-shaped hole in Houston’s heart.

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