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Chipotle Mexican Grill, Inc. (CMG): CHIPOTLE-nomics: A Short-Term Supply Struggle

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Chipotle Mexican Grill, Inc. (NYSE:CMG)’s website educates readers on the principle of “CHIPOTLE-nomics”: “By increasing the demand for naturally raised meats, we can actually increase the available supply.” Of course this remark reflects a marketing department’s gross oversimplification — it also reveals an appealing sentiment at the heart of Chipotle’s “Food with Integrity” marketing motto.

Chipotle Mexican Grill, Inc. (NYSE:CMG)

The question of CHIPOTLE-nomics’ validity — whether the company can continue sourcing meat that meets its “natural” standards, and at prices and quantities that encourage steady menu prices alongside rapid company expansion — determines whether the stock stands overpriced or a steal.

In 2011, Chipotle Mexican Grill, Inc. (NYSE:CMG) served nearly 100 million pounds of naturally raised meat. That makes it the world’s leading natural meat-serving restaurant chain. With great quality and quantities of steak, however, comes great responsibility and risk. Chipotle Mexican Grill, Inc. (NYSE:CMG) has built its successful differentiated brand on high-quality food that surpasses the competition, and happily boasts that its “changing fast food” culture for the better by serving humanely raised, antibiotic-free meats.

Yet the same rare meat that Chipotle Mexican Grill, Inc. (NYSE:CMG)’s success depends upon may threaten its future growth and profitability. Due to price hikes and scarcity, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s periodically served conventional meat in regional store locations, and warns that it may do so with higher frequency in the near future. Combined with Chipotle Mexican Grill, Inc. (NYSE:CMG)’s January announcement that it may raise menu prices mid-year (due to natural meat and dairy’s cost), the company faces an uphill struggle.

An uphill struggle along the quantity demanded curve, that is. As Chipotle continues to expand faster than small farmers can get into the natural meat business, the company’s demanding more of a commodity that’s already in short supply, which drives up market prices in the short term. That’s why Chipotle’s had to consider raising prices as well as serving conventional meat — the combination of which may deter customers for reasons both economical and personal.

Chipotle risks alienating mainstream consumers with price hikes and conscious ones with conventional meat. Either group’s reduced demand for Chipotle will threaten its growth and give competitors a boon. What distinguishes Chipotle from its competitors?

Alleged Competitors: Yum! Brands, Inc. (NYSE:YUM) and Panera Bread Co (NASDAQ:PNRA)

Chipotle’s foremost competitors include Yum! Brands, Inc. (NYSE:YUM)’s Taco Bell. In July 2012, Taco Bell debuted a more premium Cantina Bell menu as competition against Chipotle. Offering menu items similar to Chipotle’s for about $2 cheaper, Cantina Bell surpasses Taco Bell’s standard quality, but does not rival Chipotle — the menu’s website makes no mention of the chicken and steak’s production quality, so it’s likely conventional (not “natural”). And there’s no organic produce like Chipotle advertises. Will Chipotle’s customers, who willingly pay $7-12 for their meals, sacrifice quality for two bucks?

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