The earliest inhabitants of the Arroyo Grande valley were Chumash Indians, who conducted extensive trade with other Native American tribes at considerable distance.
The first Europeans to see the area were the crew of Portuguese explorer Juan Rodríguez Cabrillo, working in the service of Spain. The Spanish Portolà expedition of 1769 was the first European visit by land. When Mission San Luis Obispo de Tolosa was established nearby, the Portolà trail became part of the road connecting the 21 Spanish missions (today called El Camino Real). Later, agricultural activities expanded into the area. The Arroyo Grande valley was found to have particularly fertile ground, and was given the name meaning “wide riverbed” in Spanish.
Francis Ziba Branch, originally from New York, saw the area on a hunting expedition during the period when California was part of Mexico. Branch married María Manuela Carlón, and this marriage entitled Branch to file claim for a Mexican land grant. In 1836 he and his wife and baby son moved onto Rancho Santa Manuela. They were managing a successful cattle ranching operation when California became a U.S. territory, and then a U.S. State. But some years later they suffered financial difficulties during a drought when many cattle died. They sold off smaller parcels of land to settlers.
In 1862, the San Luis Obispo Board of Supervisors established the township of Arroyo Grande. Businesses developed along a road called Branch Street to serve local agriculture. A railroad depot was built in 1882. The city of Arroyo Grande was incorporated on July 10, 1911.
Arroyo Grande experienced rapid growth in the 1970s and 1980s, partially due to the expansion of the wastewater treatment plant, under an EPA Clean Water Grant, that removed a growth constraint. This federal grant program required preparation of an Environmental Impact Report, which document provided much of the initial environmental database for Arroyo Grande. Arroyo Grande is located in a coastal ecosystem within the California floristic province, and the native habitats include coast live oak woodland, central coastal scrub, willow and mixed riparian along Arroyo Grande Creek and numerous tributaries, native bunch-grass grassland, coastal prairie, dunes and intertidal zone, and non-native and agricultural areas.