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McDonald’s Corporation (MCD), Yum! Brands, Inc. (YUM): What Chipotle Mexican Grill, Inc. (CMG) Can Learn From Starbucks Corporation (SBUX)

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With a market cap of $12.5 billion, and a P/E over 40, Chipotle Mexican Grill, Inc. (NYSE:CMG) has investors wondering if it can maintain the long-term growth rate necessary to justify its high valuation. And considering Chipotle shares already tanked once following a slowdown in sales growth, investors may fear a similar tumble.

With a market cap of that size, Chipotle Mexican Grill, Inc. (NYSE:CMG) is already one of the largest restaurant companies on the market. Larger peers McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) trade for the much more modest earnings valuations of 17 and 23, as the two older chains dwarf Chipotle in size. Compared to just 1,500 total Chipotle Mexican Grill, Inc. (NYSE:CMG) locations, there are about 35,000 McDonald’s restaurants around the world, and over 39,000 restaurants under Yum! Brands, Inc. (NYSE:YUM)’s umbrella, which includes KFC, Pizza Hut, and Taco Bell. With such a large footprint already, a significant expansion is nearly impossible for McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM).

Chipotle Mexican Grill, Inc. (NYSE:CMG)

However, there’s one larger restaurant chain that could serve as a model for Chipotle Mexican Grill, Inc. (NYSE:CMG) as it grows into its lofty valuation- — Starbucks Corporation (NASDAQ:SBUX). The coffee empire has rebounded from a recession-era share price below $9, to over $70 today, or a gain of approximately 700%. It’s now worth over $50 billion, but still carries a P/E ratio of 34, meaning the market expects its torrid growth to continue. In its latest quarterly report, Starbucks Corporation (NASDAQ:SBUX) grew its earnings per share a whopping 28%, to $0.55, on a 13% increase in revenue. That compares to just a 1% sales increase for Yum Brands (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) in their latest reports.

Starbucks Corporation (NASDAQ:SBUX) grew its comps 8% in the quarter, saw its operating margin jump 150 basis points to 16.4%, and opened 341 stores to bring its grand total to 19,209.

What’s brewing inside

Despite Starbucks Corporation (NASDAQ:SBUX)’s numerous partnerships, co-branding initiatives, and steps to add new technologies like mobile payments, its growth is still driven primarily by simply adding new stores and growing sales within its current stores.

In its most recent quarter, Starbucks Corporation (NASDAQ:SBUX)’s strong organic growth was paced by increasing sales in the Americas and China Asia-Pacific regions, as Europe continues to pull out of a recession. The vast majority of sales come from its Americas region where revenues grew 12% in the quarter, and operating margin improved to 22.3%, but the Far East has proven to be a juggernaut. In the Asia/Pacific region, sales increased 29% and operating margin reached a stellar 36.2%. As we’ve seen with many other American brands across the Pacific, the Asian market is clearly hungry for Starbucks.

Innovation

On the earnings call, CEO Howard Schultz noted the company’s “flywheel” strategy, which leverages digital, loyalty, and mobile capabilities, and uses Starbucks’ brand partnerships to further drive profitability. The extensions Starbucks has made across the high-end beverage market in recent years are unparalleled. While some observers once saw Green Mountain Coffee Roasters‘ Keurig single-cup brewing system as a threat to Starbucks’ more-expensive cup of Joe, the coffee chain, after initial resistance, partnered with Green Mountain and began producing its own K-cups. It just shipped its one-billionth branded K-cup in the last quarter. Similarly, the company has made a number of acquisitions, including Tazo, Teavana, and Evoultion Fresh, which give it further growth opportunities, and leverage its operational excellence. With its mastery of the coffee market, it only makes sense for Starbucks to set its sights on tea and fresh juice. Starbucks is also continually introducing new menu items such as its Clover-branded french press coffee, La Boulange baked goods, or the Valencia Orange Refresher

Finally, Starbucks’ inroads into digital payments have been a savvy strategy to improve efficiency and increase brand loyalty. Dollars loaded on Starbucks cards grew 30% from a year ago, and dollars loaded via mobile and the web nearly doubled. The Starbucks card is now used in almost a third of all U.S. transactions, and more than 10% of its domestic sales are now done through its mobile app.

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