Catering Could Keep Chipotle on Track

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chipotle (NYSE: CMG) faces tough challenges in 2013. The burrito chain knows that rising food costs threaten its margins. This restaurant also needs to beat tough comps. Chipotle could hike its burrito prices, but competitors like Yum! Brands' (NYSE: YUM) Taco Bell and Jack in the Box's (NASDAQ: JACK) Qdoba could capture market share. Chipotle needs a value proposition that gives diners a good reason to pay more. The new Chipotle catering service helps Chipotle address all of these problems at the same time.

Diner Demand

The Fool's Rick Aristotle Munarriz explained that Chipotle expects to miss analysts' $2.09 EPS projection by 12 to 17 cents per share in 4Q 2012, but the chain expects to beat analysts' $690.9 million sales projection for the quarter by $8.3 million. The strong sales number shows that Chipotle's promotional strategies worked. Chipotle's Boorito Halloween costume contest and other promotional programs, such as gift cards, brought more diners into its restaurants. The costume contest and gift cards lured diners with discounts, and now the burrito chain has to convince diners who showed up for cheap meals to spend more money in 2013.

Catering Appeal

Chipotle can collect more money from health food enthusiasts without chasing off value oriented diners by offering catering. Chipotle built a premium brand using antibiotic free meat, local suppliers, and organic products, which separate the restaurant from cheaper alternatives. This health brand helps distinguish Chipotle from other restaurants that offer catering, as well. Chipotle also attracts more price sensitive customers who could pick up cheaper burritos from Taco Bell though, so hiking prices on the entire menu could still mean lower overall income.

Even if Chipotle keeps its in store prices the same, the restaurant's overall profits could still rise because of this catering program. Catering customers won't have to wait in line, which could be worth paying higher prices. Catering could also help Chipotle restaurants deliver higher same store sales growth, a metric that's harder to improve when a restaurant's packed on a regular basis.

Competition

Qdoba lists several catering options at its own website, and the chain even offers a Naked Burrito Bar that competes with Chipotle's catering service. Qdoba's owner Jack in the Box definitely has a good thing here. Analysts don't expect Jack in the Box itself to grow as fast as Chipotle, though. Chipotle currently has a trailing P/E of 32.6 and a PEG ratio of 1.6, while Jack in the Box has a trailing P/E of 22.4 and a PEG ratio of 1.76. Right now, Chipotle looks like a better growth pick, but Qdoba remains a competitive threat.

Panera (NASDAQ: PNRA) probably won't come out with a burrito bar anytime soon, but the sandwich shop does look prepared to continue its own catering supported expansion. With a trailing P/E of 29.8 and a PEG ratio of 1.45, Panera looks cheaper than both Chipotle and Jack in the Box, although the bread maker's stock is still pricy. The bread maker also launched a new marketing initiative recently. E.B. Solomont, at the St. Louis Business Journal, reported that Panera now offers a secret, low carb menu, which could help the chain gain loyal customers. A secret menu wouldn't make sense for Chipotle though, since a diner simply points out which items to add to an entree. A Chipotle diner could order a burrito bowl instead of a burrito made with a wheat tortilla, and leave out high carb ingredients like rice to achieve the same effect.

A restaurant can also help diners cater meals themselves by offering group deals, which Yum!'s Taco Bell has done for a long time by selling dozen taco packs. Lisa Jennings, at National Restaurant News, reports that Taco Bell has now freshened up its menu by selling dozen taco packs that contain six of its newer Doritos shell tacos and six of its traditional crunchy shell tacos. This variety pack doesn't directly challenge Chipotle because it's targeted at a lower end market, but Taco Bell could introduce group Cantina Bell deals in the future.

Takeaway

Catering won't save Chipotle from a miss on income this quarter, but the restaurant already took the hit over its guidance cut, closing 5.5% lower on January 16, 2013. Chipotle plans to test out its catering service in its home base of Colorado first, and the plan shows promise, so a national expansion could happen soon. Panera and Qdoba already demonstrated that catering can work for a fast casual chain. Chipotle's growth prospects look much better after the company's catering service announcement.


enovinson has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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