Next week, Chipotle Mexican Grill, Inc. (NYSE:CMG) will announce their Q4 earnings, and once again it will show them gobbling up market share.  How much market share? Well, enough to rocket their stock price from $300 in January 2013 to $717 in January 2015. 

Much has already been written by quants, analysts, and researchers about the reasons for this massive growth, but I’m sorry, you don’t just DOUBLE+ your stock price in 24 months because of “Fresher ingredients” or cool tag-lines like “Food with Integrity,” so I’ll tell you the real reason…

It’s the Economy, Stupid

In 2008, I authored an eBook entitled “Banks, Tanks & Angst - How Long Will America Idle?”

(Cool Cleveland: Banks, Tanks & Angst – How Long Will America Idle?) in which I predicted a massive economic collapse lasting 3-5 years because of a financial disconnect which I coined “Lagflation."  Lagflation is defined as, “A condition in which the average American income LAGS the cost of the average American lifestyle.” While over 15 specific events and macro trends predicted in this book have since transpired, I was partially wrong on one important point, namely that this Lagflation would only last 3-5 years  - as it is now 2015, and this economic malaise and disconnect is still with us…7 years later!

The reason for Chipotle’s meteoric success is simple – they sell good food for 50% less than the alternatives (or “substitutes” as they’re called in Marketing 101).

Here’s the math that millions of Americans like me do every day.  It’s dinner time.  I’d like to enjoy a meal containing a hearty portion of protein (beef/steak) and carbohydrates (potatoes/beans), but I don’t want to cook.  If I get a table for two at Ruby Tuesday, here’s what I’d pay:

$9.99 Cheeseburger and fries

$9.99 Cheeseburger and fries

$2.39 Diet Coke

$2.39 Diet Coke

$24.76

+ $2.23 Tax

$26.98

+ $4.04 tip (15% Tip)

$31.02 Total

However, if I wanted to get carry-out for two at Chipotle, here’s what I’d pay:

8.74 Steak Burrito (includes rice, beans, etc.)

8.74 Steak Burrito (includes rice, beans, etc.)

$17.48

+ .50 (Diet Coke from fridge – 2 servings from 2 liter bottle)

$17.98 Total

So, there’s your answer. Every day, American consumers  - challenged with “solving supper” -  are voting with their wallets and deciding, “I would rather pay $17.98 for carry-out at Chipotle and drink my own Diet Coke at home (and pay .50 cents versus $5.00+) and thereby “solve supper” for around $18, versus paying over 50% MORE ($31) by eating at Ruby Tuesday (RT).

Consumers aren’t stupid. They’ve figured out that they can avoid the cost of tipping by eating at places without waiters, and they can avoid paying tax on food if they order carry-out. By cutting out a 9% sales tax, a15%-20% tip, and a 10x mark-up on beverages, they can keep 50% MORE of their flat-lining wages. Here’s how that math plays out over a week or a month:

• The cost for a week of Ruby Tuesday dinners-for-two would be $217.14   ($11,291 for a year)
• The cost for a week of Chipotle dinners-for-two would be $125.86   ($6,544.72 for a year)

When you already have a 50% cheaper solution, AND THEN add branding like “Fresher ingredients” and “Food with integrity”…it’s a no-brainer.

Still don’t believe me – try this. Ruby Tuesday (RT) stock WAS at $14.84 in January 2011 and by January 2015 had dropped all the way down to $5.82.  Sure, you could blame the “Economy” or the “Polar Vortex,” but under these SAME economic conditions, Chipotle’s stock managed to double from $300 in January 2013 to $717 in January 2015. 

So now you know the stupid, simple reason Chipotle keeps eating their lunch.

(Small Print)

• Tax rates vary from state to state, as do variances in how/what consumables are taxed.
• Waiters are valuable employees and should be fairly compensated for their hard work (I know, I was in food service as a youngster).
• Yes, I take my wife out on dates, and actually eat in restaurants and enjoy paying for the experience of good service.
• While these aren’t true apples-to-apples comparisons (e.g. one is on-site and one is carry-out), they are the decisions and trade-offs the consumer makes every day in search of value.  The hemorrhaging of Ruby Tuesday’s stock price while Chipotle’s continues going through the roof shows that consumers are voting with their wallets and prioritizing one “value experience” over the other.
• Just as consumers have gravitated towards CUV’s which combine the best of sedans and SVU’s, the fast casual segment combines the best of both food worlds – a food quality which is higher than fast food AND a price which is significantly less than casual dining.
• I have no positions in any of the stocks or industries referenced above.