Chipotle's Expansion Strategy Great for Stock
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Evolution of the “fast food restaurant” is well upon us, with new companies excelling and original ones improving to keep up. Originally, fast food joints became popular because of cheap prices for seemingly delicious food, and easy and fast accessibility, but current trends and preference for healthier diets has given an upper hand to health conscious companies.
Dominating the news recently is Chipotle Mexican Grill (NYSE: CMG) The fresh, healthy, and speedy Mexican restaurant that has been gaining popularity rapidly across the nation. Not only are there several news reports of Chipotle's impressive success, but word on the street as well as several social media sites are constantly abuzz with favorable opinions about its menu.
Chipotle will do extremely well for several reasons. First, it focuses heavily on using healthy and sustainable food products that are non-GMO including organic beans, naturally raised meats, and locally grown produce. In the past there has been so much negative controversy with the quality of meat in fast food chains, that it has left a lot of people concerned about the contents of their meals. For example, Yum! Brands (NYSE: YUM) subsidiary Taco Bell had a previous media outbreak questioning the quality of its seasoned beef, and McDonald's (NYSE: MCD) experienced the same dilemma regarding the contents of a chicken nugget. Unfortunately shocking news like that, and even worse, leaked videos that go viral showing obscene production processes, can severely hurt a company, and turn consumer trends towards healthier options. According to an online customer opinion site, Chipotle customers report that they like it because of its great tasting and fresh food.
As expected, the original fast food chains have begun making improvements that pertain to the recent health-conscious eating trends, despite that it will be costly to switch to healthier foods. McDonald's has added several healthier items to its menu including salads, snack wraps, fruit smoothies, and fruit options for Happy Meals. Interestingly, McDonald’s is considered as a nice restaurant in Europe because it uses higher quality ingredients there than it does in the U.S. Still however, sales growth in Europe was only 5% compared to 8.9% in America, most likely due to the economic depression across seas, but it's still growth, and both are likely from the introduction of the McCafe and the healthier food options. Luckily Chipotle began with the marketing aspect of being a healthy fast food restaurant so it does not have to worry about improving its image like McDonald's does.
Honestly, after the things I have heard about the meat at Taco Bell, I would never eat anything from there, but there has been recent talk about the chain improving its menu to one similar to its number one competitor, Chipotle. I do not see Taco Bell making any drastic improvements though, especially considering that Yum! has closed about 1,000 restaurants since 2000, and is planning to continue to try to franchise out the rest. It almost seems like Yum! has lost either hope or interest in Taco Bell considering its main focus has been expanding its other two subsidiaries, Kentucky Fried Chicken and Pizza Hut in China, leaving the 98% of Taco Bell restaurants back in the states. It may just be too hard for Taco Bell to recover from the gruesome ingredient rumors it has endured in the past to be any match for Chipotle's popularity.
Compared to the Mexican restaurant Qdoba, a subsidiary of Jack in the Box (NASDAQ: JACK), the food is at least also considered fresh, healthy, and tasty, yet its location choices and store setup do not exactly cater to the demographic that would make them the most money. This leads me to the next reason why Chipotle will continue to increase in popularity. The purpose of a fast food restaurant is to provide tasty, healthy, quick, and importantly, affordable food, to customers who prefer such qualities. These customers are typically younger, and in heavily populated areas, which is why Chipotle is smart for opening smaller, easy to access stores in big cities and near college campuses. Qdoba on the other hand has larger restaurants that are typically found in less densely populated areas, making me think they want to lean more towards being considered a restaurant than a fast food chain.
Currently, Chipotle has 1,230 company owned restaurants, which means it has ample room to expand and grow in revenue. Qdoba has 57% of its stores franchised and is planning to franchise 70-80% by the end of the year. Most of McDonald's 33,510 are franchised, not to mention are prime real estate locations, which adds to its profit through rent. I think that since Chipotle is already doing so well, it should consider franchising as well to increase revenue growth and expansion.
Recently Subway, which has a privately owned stock, surpassed McDonald’s in the amount of stores it has, making it the largest restaurant chain in the world with 600 locations and 33,749 shops. Subway made its expansion possible partly through marketing tactics that promote itself towards current trends. Take for example its marketing campaign with Jared who lost so much weight just by eating delicious sandwiches that are low in calories and healthy.
Panera Bread (NASDAQ: PNRA) has also been experiencing an increase in popularity in its 1,380 company owned and franchised cafes. It follows the healthy food concept like Chipotle does which makes it a popular option for a lunch break. Service does take longer though and is no comparison for Chipotle's made-in-front-of-you meals. Most customers consider how quick food is served, and Chipotle even has the option to pre-order food online and from its smart phone app.
Expansion should definitely be Chipotle's main priority right now. It already has a massive fan base that immensely appreciates its fast, fresh, healthy food, fun environment, and quality service, now it just needs to offer that in more locations. Its stock price will likely increase with its projected increase in revenue, so I would also suggest buying now before the already high price of around $416 gets even higher.
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. If you have questions about this post or the Fool’s blog network, click here for information.