It is true that Chipotle Mexican Grill, Inc. (NYSE:CMG) is keeping market watchers busy speculating whether its growth story is slowing. The rise in food inflation, modest same store sales growth and growing competitive pressures are raising questions on the company’s premium valuation.
But my take is that there is still upside left for Chipotle Mexican Grill, Inc. (NYSE:CMG). The company has enough room to grow sales by tapping more markets at home and overseas.
These trends are visible in the first quarter numbers where revenue increased 13.4% driven by new outlets and fueled a solid earnings growth of 24.4%.
Expansion of stores in US
There is no doubting the fact that Americans love Chipotle Mexican Grill, Inc. (NYSE:CMG). Its ‘Food with Integrity’ has struck the right cord with a population that is increasingly opting for healthier food options even if they have to dish out a few extra dollars.
This paves the way for the company to increase its count of restaurants significantly over the coming periods. And Chipotle seems to be doing just that. It opened 48 new outlets in the first quarter of 2013, which brings its restaurant count to 1,458. This is approximately 10% of the number of McDonald’s Corporation (NYSE:MCD) in the US. So there is still huge room for growth.
In 2013 Chipotle Mexican Grill, Inc. (NYSE:CMG) plans to open 165-180 outlets, out of which 40% will be constructed in new real estate and the remaining 60% on remodeled sites. Last year it opened 200 restaurants.
Demand will grow
Slowing comps have been worrisome in the first quarter when Chipotle posted just 1% growth in same store sales. However this can soon change. Although it is unlikely that the company will return to double digit growth that was the case even about a year back, improvements in comps are inevitable over the coming quarters.
First of all Chipotle Mexican Grill, Inc. (NYSE:CMG) is making some interesting additions to its menu. Its experiment with a new spicy tofu based item cooked with roasted peppers and called ‘Sofritas’ has created a lot of buzz in San Francisco bay area. A national launch may not be far off. The chain has also introduced a premium Patron Margarita from end April priced at around $6.50 to $8 depending on the location. These new items should be crowd pullers over the coming months.
Next, Chipotle has recently launched its catering service, which allows customers to use portable version of the chain’s services for groups as small as 6 and as big as 200.
Given that peers like Panera Bread Co (NASDAQ:PNRA) and Qdoba Mexican Grill owned by Jack in the Box Inc. (NASDAQ:JACK) derives around 7-8% of their revenue from catering service, this would be an important line of business for Chipotle too. The company currently offers catering in some 14 states, but Chipotle has planned to expand this service nation-wide by the end of the third quarter of 2013.
Finally, the company is improving its brand awareness through meaningful promotions. It recently hosted day long ‘Cultivate Festivals’ at San Francisco, Denver and Chicago to spread awareness of local and sustainable farming. These festivals hosted by Chipotle Mexican Grill, Inc. (NYSE:CMG) come with attractions like live demonstration by celebrity chefs, live music, local beers, and special festive menu from Chipotle’s kitchen. The company has raised its marketing budget from 1.3% of sales in 2012 to 1.7% in 2013.
Penetrating Untapped World Markets
Chipotle has just 12 restaurants outside the US. There are about 5 in Canada, 6 in London, and 1 in Paris. According to a survey conducted in London only 1% of survey takers knew about Chipotle without prompting as compared to 23% for McDonald’s. The chain is yet to foray into Asia. So there is the whole world out there waiting.
It is true that the task is challenging given that Chipotle has to tread cautiously. It owes its success to its superior food quality which in turn means excellent supply chain management. So, new markets can only be added when the company finds appropriate suppliers and this is often difficult. The food scandals surrounding Yum! Brands, Inc. (NYSE:YUM) in China on account of supplier issues are cases in point.
Never-the-less international expansion remains a key factor for Chipotle for fueling growth.