Sunday, 27 July 2014

Chipotle Mexican Grill the McDonalds of the new generation

Chipotle Mexican Grill (CMG) is the fast casual dining pioneer. It was started with the idea that food served fast did not have to be a typical fast food experience. CMG is the McDonalds of the teen generation. While other retailers are complaining about the weather CMG reported double digit same store sales increases. CMG is benefiting from the move to fast healthy food with the quality expected of full service restaurants but with the speed and convenience of fast food and with no tips! 

Food with integrity?
CMG was founded by a chef named Steve Ells. His initial idea was to open his own restaurant but to fund it he decided to open a little Burrito store which then took off as Chipotle Mexican Grill. CMG is focused on using the freshest food that is also grown and raised sustain-ably with respect for the animals, land and farmers. In 2000 CMG realised they could charge more for better quality food and increase sales. When they started serving naturally raised pork in 2000 they had to raise prices by a dollar but sales increased as it turned out people like to feel good by buying responsibly raised food. This lead to serving 100% naturally raised chicken and beef.

                                                    A common site at a CMG store

McDonalds & the Burrito
McDonalds was an early backer investing in CMG when it was a 14 store chain. By 2002 MCD owned more than 90% of CMG shares. McDonalds divested the last of its stake in 2006 in the IPO. While they made a lot of money with the IPO CMG's current price is $675 versus the IPO price of $22 McDonalds left more than ten billion on the table. It was a great investment by McDonalds and in hindsight was amazing they did so well together with a totally different approach to food, sustainability and attitudes toward their workforce. While CMG average starting wage is not much higher than minimum wage their managers also known as restaurateurs can make 6 figure salaries.

The McDonalds of the teen generation
While CMG has been successful they still only have 1,637 restaurants and plan to open 180-195 new restaurants this year. The growth opportunity still has a ways to go with a target of 4,000 stores in the US with CMG likely having double digit store openings for the next decade. The cash on cash returns for new stores are amazing at 72% which compares to the industry averages of 25%-35%.

Breakfast and drive through are future opportunities. CMG stores open up between 10-11am suggesting that there is future potential to serve their products in the morning. CMG have recently rolled out catering for 20+ people it is currently 1% of sales, and mostly incremental with an average order of nearly $300.

Concept optionality
ShopHouse and Pizzeria Locale are some of CMG growth options. There are six ShopHouse restaurants (SouthEast Asian concept) and one Pizzeria Locale all tied together by the concept of fast casual with a food culture of sustainability. CMG itself is still an international growth opportunity opening a third restaurant in Paris with 10 restaurants in Europe. CMG have not disclosed sales volumes of the ShopHouse and Pizzeria Locale but they have said that they are behaving similarly in general to when CMG was unknown back in early 2000. 

The hottest report so far
CMG recently announced same store sales of 17.3% a ridiculously good number. This was CMG second highest sales comp as a public company second only to their first quarter as a public company in 2006. To put it into context back then CMG had 500 restaurants compared to the 1,700 today the annualised increase is nearly the total of CMG sales in 2005. They increased prices by an average of 6.25% and saw no real resistance to the increase. Prices have not increased since 2011 three years ago.

CMG is the leader in fast casual dining and is benefiting from the trend towards healthy eating. The only problem is the price, the multiple on the stock has priced in some of these near term opportunities. Much like CMG lines we will wait in line and hope we will get served up a better price.


Disclosure: Decisive does not have a position in Chipotle Mexican Grill (CMG) stock

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