Chipotle Mexican Grill, Inc. (CMG) & The Mexican Quick Serve Biz

Chipotle Mexican Grill, Inc. (NYSE:CMG)Mexican-style takeout has been an integral part of the American dining category, at least since 1962 when Glen Bell opened the first outlet of his eponymous fast-food chain in California. The segment has benefited from growing popularity, as well as the nation’s continuously rising Hispanic population. According to the U.S. Census Bureau, Hispanic people will account for 22% of America’s population by 2030, compared to 16% in 2011. In addition, Mexican-inspired fast food can be healthy, particularly when green leafy vegetables and beans are added to the mix. So, which food chains are winning customers?

Chipotle Mexican Grill, Inc. (NYSE:CMG)

Founded in 1993, Chipotle Mexican Grill, Inc. (NYSE:CMG) has been growing very fast and taking a significant amount of market share from industry leader Taco Bell. The company redefined the Mexican food category with its “Food with Integrity” mission, which utilizes high-quality ingredients that are often purchased from organic and locally grown sources. In addition, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s limited menu choices improve its scale economies, leading to higher profit margins and more cash flow for reinvestment purposes.

In fiscal year 2012, Chipotle Mexican Grill, Inc. (NYSE:CMG) continued growing at a fast pace, with increases in revenues and operating income of 20.3% and 29.9%, respectively, versus the prior year. The company’s sales growth benefited from continued expansion across the U.S., as well as a 7% gain in comparable store sales. While Chipotle experienced rising costs for labor and food commodities, it has been able to partially pass these costs on to consumers through menu price increases.

Looking ahead, Chipotle Mexican Grill, Inc. (NYSE:CMG) is expecting to add another 10% more outlets to its current base of more than 1,400 restaurants in 2013. While the company is primarily U.S.-centric, it has opened beachhead stores in select international markets that are serving as a test for future expansion in those markets. In addition, the company is sponsoring food festivals in the U.S. as a way of bonding with customers and further solidifying its rising market share.

Fiesta Restaurant Group Inc (NASDAQ:FRGI)

While Fiesta Restaurant Group Inc (NASDAQ:FRGI) is primarily a regional player, with most of its restaurants located in Florida and Texas, it has been slowly expanding into neighboring states. The company currently runs two dining concepts, its Pollo Tropical and Taco Cabana units that serve diners with Caribbean-inspired and Mexican-style food, respectively. Like competitor Chipotle Mexican Grill, Inc. (NYSE:CMG), Fiesta’s Taco Cabana unit focuses on high-quality food ingredients in an open restaurant layout, which encourages interactive between customers and servers.

In fiscal year 2012, Fiesta Restaurant Group Inc (NASDAQ:FRGI) reported marginally improved results, with increases in revenues and adjusted operating income of 7.3% and 3.0%, respectively, compared to the prior year. While the company achieved a solid 5% gain in comparable store sales at Taco Cabana, commodity cost inflation hurt its overall profitability. Fiesta was able to raise prices to offset a portion of its cost pressures, but its limited size doesn’t provide the same purchasing efficiencies that are available to its larger competitors.

Looking ahead, Fiesta is finally hoping to cash in on the strong popularity of Mexican-style food with its first meaningful expansion of its restaurant network in the past five years. Investors have bid the company’s shares up sharply over the past twelve years, hoping to catch a rising star early in its development. Given Fiesta’s current limited geographic reach beyond Florida and Texas, it has substantial opportunities to increase its base of restaurants across the U.S. While Fiesta’s previous leveraged buyout has saddled the company with relatively high debt levels, strong operating cash flow should allow it to manage its repayments and have ample funds for future growth.

Yum! Brands, Inc. (NYSE:YUM)

Yum! Brands, Inc. (NYSE:YUM)’s Taco Bell unit has long dominated the Mexican-style food category, with a current domestic market share that is estimated at 49%. While the company’s cheap menu options find favor with the value-conscious component of its customer base, people looking for higher quality and healthier choices have moved on to competitors, like Chipotle Mexican Grill, Inc. (NYSE:CMG). In response, Yum! Brands, Inc. (NYSE:YUM) has worked hard to refranchise and rebrand its Taco Bell unit with higher quality ingredients and a chic marketing message. The result has been rising customer counts and profits at Taco Bell, which has offset some of Yum! Brands, Inc. (NYSE:YUM)’s operating weakness in other segments.

The bottom line

Taco Bell launched an industry when Glen Bell opened his first store in 1962. However, the company needs to continue to upgrade its food choices if its wants to keep the portion of its customer base that is looking for good food at a reasonable price. While favorable demographics support a good case for all of the competitors, Chipotle Mexican Grill, Inc. (NYSE:CMG) has the best recipe for success.

The article Taking Stock of the Mexican Quick Serve Biz originally appeared on Fool.com and is written by Robert Hanley.

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