Chipotle: A Once-Tainted Brand That's Back On Top

Quick Summary

Chipotle (CMG) operates about 2,600 quick service restaurants, primarily in the United States. Food items are Mexican-inspired, including burritos, burrito bowls, tacos, and salads. It uses an "assembly line" style preparation window (inspired by Subway), that incorporates few but high quality ingredients, enabling full customer customization. Almost 20% of sales come from the digital channel, where customers order through the Chipotle phone app and simply pick up their prepared order from a shelf (known as "Chipotlanes").

Does The Company Have Recurring And/Or Rising Revenues?

SOMEWHAT. Chipotle has bounced back admirably from food safety issues in 2015-16, delivering 13% annual revenue growth over the past 3 years and returning to impressive same store growth. At 2,600 locations, it is still significantly smaller than competitors like Subway (25k units), McDonald's (14k), and even Burger King/Pizza Hut/Taco Bell, who all have topped out at about 7k in the U.S. That indicates meaningful expansion potential still ahead for Chipotle - management has talked about a store potential of 4-5k. The firm has been a leader in developing a digital sales channel, with digital sales doubling in 2019 and driving much of its same-store sales growth. Menu item expansion, particularly into breakfast, is another growth opportunity. On the recurring side, we don't consider restaurant sales as recurring revenue - there are just too many options.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. The restaurant business is quite difficult to build any kind of competitive moat in. Switching costs are non-existent and competition is fierce. Chipotle was built on a strong CONSUMER BRAND based on its higher quality ingredients and simple, customizable customer experience. This was badly tarnished in the e-coli outbreaks of 2015-16, but under new CEO Brian Niccol, the firm has rebounded strongly. Driven by its digital offerings and a renewed focus on quality of both food and service, customers are coming back and the brand is again strong. This makes Chipotle an "automatic purchase" decision - a default option for dining around its locations. However, it is tenuous - all it takes is another food scare or declining service standards to tarnish the brand once again.

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Adam Reynolds 1 year ago Member's comment

Surprising on $CMG. I would have thought restaurants would not be faring well in this environment.