Chipotle: Is there more to come?
In a recent equity research report performed my fellow colleagues and I, we’ve come to realize several different things about Chipotle. First of all, Chipotle is still growing. Within the last 5 years, they’ve grown significantly in size around the US with goals of between 160 and 180 new stores every year.
But what is it that makes Chipotle so successful?
My group and I have derived three foundational causes:
1. Small menu
2. Streamlined process
3. Recommendations over advertising
Chipotle has a small menu and this has made the experience significantly easier for anyone who eats at Chipotle. Customers have a few choices between a burrito or bowl, a few different meats, and so on. The limited menu actually speeds up the choice process so one isn’t burdened thinking about more choices than necessary.
Furthermore, while lines reach the door during lunch and dinner, the wait is never too long. The ingredients are laid out in an organized manner like Subway but the food does not need to go through additional cooking because it has already been prepared. Compared to its competitors, Chipotle has the minimum wait time for the procedure one must go through to get their food.
Chipotle is an entirely unique company compared to Taco Bell, McDonalds, and other fast food places in that it lets the customers do the advertising for them via recommendations. While you may be tempted to try a new restaurant due to a commercial online or on tv, most people are more compelled to go if a friend vouches for the quality of the restaurant.
My colleagues and I are currently undergraduates at a large state school and Chipotle is a common hangout place for many students. I’ve joined various clubs and associations and made many friends and Chipotle has always come up as a common denominator when it came to favorite fast food restaurants. All of this done without mass media advertising.
Income Statement Analysis
After gathering information from quarterly reports and 10-k’s, we’ve realized that Chipotle is still growing. In the last three quarters, revenues rose just around 20% each time. Hence, this is likely to explain for the 51.33 P/E ratio. Within the last month, my group has seen almost a 10% increase in Chipotle’s stock value.
Where now?
Now I’d like to extend this to the WSO community. Do you have any concerns or qualms about Chipotle’s growth? Where do you see this growth ending and if so, why?
I noticed that they increased their prices recently and I think Chipotle still has room to grow. Compared to some fast food alternatives, Chipotle offers a similar convenience factor while being slightly healthier if not a lot healthier (just depends on what you get there). I think they will introduce a couple more items into their menu as time goes on and I'm sure we'll see more of them pop up. I haven't looked into it yet but does Chipotle have locations outside the U.S?
Oh and Chipotle is the single reason I'm broke right now.
i see growth concerns because they have refused to add fish tacos to the menu
With their current model, I don't see the same growth you do. Comparing them to McDonalds and Taco Bell truly doesn't make sense. McDonalds and Taco Bell have things like the dollar menu and cheaper alternatives, Chipotle has no option for meal deals. The market they are missing is the people who frequent fast food because the price and convenience. They are increasing their prices, going in the wrong direction.
I don't disagree with you, but you could've just said chipotle has got their marketing mix right. They aren't creating a new market or doing anything innovative anymore, they're just a one-trick pony building new stores until they completely fill the gap. I don't think anybody except chipotle and their competitors have the market sizing data to figure that out.
There isn't much magic or competitive edge, which is why a ton of big managers have suggested shorting because this stock is expensive as hell.
Healthy and non-processed food (or so they claim), AMAZING macronutrients for someone who watches their diet, consistent food quality, and the food just tastes amazing. I eat it at least 3-4 times a week. I'd eat it everyday if I wasn't a broke college student though.
mexican food is (almost) as disgusting as indians
On Chipotle's rising prices: http://qz.com/210428/chipotles-prices-are-rising-faster-than-expected-b…
Top penetrated states: http://qz.com/206294/chipotles-plan-to-take-over-america-starts-with-be…
Great piece on Chipotle's restaurateur program, crediting promoting from within for their success: http://qz.com/183224/how-chipotle-transformed-itself-by-upending-its-ap…
Is their food really that good? My friends eat there a lot and they were even talking about how they raised their prices in a short amount of time.
They need to introduce smaller meals (eg: half sized burritos or smaller bowls, subways 6in vs 1ft). I think that will help increase visits from current customers. But I agree with couchy. Aside from new store growth, I do not see much more. The additional stores in one city can add to cannibalization. Then you will see them close unprofitable stores.
You should look at their same store growth instead of total revenue as well. Will give you a better idea of revenue growth from restaurants existing for a year.
-Slim
Also, back solve into a 5yr earnings growth numbers using the P/E multiple. If you think it attainable, then its fairly priced. If investors are still expecting 40% growth or something, then it may be over priced. Also, account for any margins increases/decrease as well in your analysis.
-Slim
Chipotle isn't fast food; it is fast casual.
It also doesn't have as many franchises as McDonalds, which is mostly franchises.
Chipotle is also organic.
Chipotle also has an asian brand: ShopHouse.
You should look into Shophouse. It is an Asian varient that was introduced by Chipotle. I believe there's only one location currently open but they are trying other veins of food. And it's pretty good to boot.
I dont see any reason to buy this stock as theres no defined catalyst that isnt already priced into the current trading price. I get that fast casual is growing and offers a healthier alternative to fast food, but there are other fast casual restaurants(potbelly, noodles & co., etc.) that capture the same audience.
Not to say I dont like Chipotle's business model and target demographic, and I understand they keep their restaurants busy, but I dont see enough evidence here for a convincing trade.
Ship's sailed
This is part of the reason why foodcarts/trucks are so successful. You hit the nail on the head. Having few menu items = fewer sku's. Fewer sku's not only leads to faster choices, but also means you have to prepare less items and stock up on a decreased variety of inventory. This leads to buying fewer items in bulk, which should in theory further increase your margines if even by a half point basis. As you said it also streamlines the process. They literally made the place like an assembly line so the customer flow happens without very many hiccups.
I have seen a few successful restaurants in the Toronto area that could be even more successful if they developed a streamlined approach and then franchised. However this isn't always the desire of the owners. Pricing wise its not even that cheap as user ValueBanker14 pointed out but all the reasons alluded to above in both my summary and the OP's post explain why its able to work. You can actually get a decent meal during your 30-60min lunch break and possibly make it back in time without eating crap. I think it would be interesting to either franchise one of these in the future and just finance the expansion in new areas or start a similar service but using a different cuisine... lets say (caribbean).
I think the start up cost of a food truck or a cart shouldn't be to bad if its done in the right area. (start-up fees plus truck should be well under 40k). Just need to find the right partner. Just a thought that I've had for a while.
Although Chipotle is currently growing, it is mainly doing so due to its youthfulness and will eventually become a cash cow just like McDonald's or Taco Bell.
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