By Lisa Baertlein
LOS ANGELES, July 18 (Reuters) – Chipotle Mexican Grill
is one of the restaurant industry’s hottest stocks, but
fickle diners and an ever-expanding selection of entrepreneurial
eateries threaten to make it harder for the upscale burrito
seller to keep delivering the explosive growth investors savor.
After two decades without significant direct challenges in
the “fast-casual” category, Chipotle is bumping up against a
bevy of new rivals that also sell $10 meals made right before
diners’ eyes in the open assembly-line kitchens it popularized.
Contrary to popular belief, the biggest threat to
Denver-based Chipotle may not be big, publicly traded Mexican
food chains like Yum Brands Inc’s Taco Bell or Jack in
the Box Inc’s Qdoba Mexican Grill, analysts said.
“It’s all these little, new concepts that are springing up
everywhere. There is a mad rush into fast-casual,” Bob Goldin,
an executive vice president at consulting firm Technomic, said.
“Not only do you have Chipotle clones, you have the
expansion of other cuisines,” said Morningstar restaurant
analyst RJ Hottovy.
Some of the fastest-growing fast-casual names include
established players like Chipotle “clone” Freebirds World
Burrito, “better” burger seller Five Guys Burgers and Fries, and
sandwich seller Jimmy John’s, Technomic said.
Other new ethnic-inspired eateries specialize in everything
from falafel to Vietnamese banh mi sandwiches.
Newly public Noodles & Co, a roughly 345-unit
chain, dubs itself “your world kitchen” and offers dishes such
as Japanese pan noodles, Wisconsin Mac & Cheese and Pad Thai.
Established in 1995 not far from Denver-based Chipotle,
Noodles is led by Kevin Reddy, Chipotle’s former chief operating
officer, and is tempting investors with its potential for the
kind of spectacular share price expansion the burrito seller
boasted in its younger years.
Noodles shares now trade at around 113 times 2013 earnings
estimates, versus about 35 for Chipotle, but its stock price is
an easier to stomach at $43 versus $377 for Chipotle.
“If there’s a long-term threat out there, it is probably
something like a Noodles. It’s going to force them to up their
game,” said ITG restaurant analyst Steve West.
To be sure, no one is predicting Chipotle’s imminent demise.
The company on Thursday reported higher second-quarter
profit after sales at established restaurants accelerated,
boosted by more aggressive advertising, catering, menu additions
and one more trading day than the year earlier.
It also is testing a new concept called ShopHouse Southeast
Asian Kitchen in Los Angeles and Washington, DC.
Even if other chains succeed in luring away some Chipotle
customers, they will have a hard time matching the company’s
ability to contain labor costs as it cranks out more sales.
Chipotle fan and stockholder Preston Motes, 44, said he is
not making any immediate bets on rival Noodles & Co.
“I’ve eaten at Noodles twice and it’s OK. If it’s Noodles &
Co. versus ShopHouse, I’d probably go with ShopHouse,” he said.
FASTER, BETTER, CHEAPER
Fast-casual chains like Chipotle appeal to diners by using
higher quality ingredients than fast-food chains and offering
meals at lower prices than limited-service “casual” restaurants
such as Darden Restaurants Inc’s Olive Garden.
According to Technomic, 2012 sales at fast-casual eateries
jumped 13.2 percent, versus increases of 5.6 percent for
fast-food chains and 2.0 percent for casual outlets.
When Chipotle’s stock debuted at $22 in 2006, it had about
480 restaurants. It plans to have roughly 1,600 units by the end
of this year.
Some of Chipotle’s growth has come at the expense of other
chains – namely rival Qdoba, which plans to close 67
restaurants, or around 10 percent of its units, this year.
Chipotle’s simple, customizable menu features organic
produce and antibiotic-free meats when possible. Young families,
office workers and college students frequent the chain, which
has quietly won over the fast-growing ranks of diners who avoid
wheat and other gluten-containing foods for health reasons.
“It’s a safe haven for those of us with eating
restrictions,” said Jenna McKay, 27, who avoids gluten due to
celiac disease and visits Chipotle so often that she is the
“mayor” of the outlet near her job in Sacramento on Foursquare.
Some analysts say the chain could ultimately double in size
to 3,000 to 4,000 North American restaurants which would be
still far less than the more than 14,000 U.S. units boasted by
McDonald’s Corp, which owned the company from 1998 until
it went public.
But the bigger Chipotle gets and the more rivals mimic its
successful model, the harder it will be to stand out.
Sales at Chipotle’s established restaurants, a key
performance gauge, cooled last summer and subsequently dipped
below the mid-single-digit percentage growth that some analysts
say the chain needs to protect profits. (Graphic on Chipotle
restaurant sales: http://link.reuters.com/duh79t)
On Thursday, the company dashed investor hopes that those
sales would get an additional boost from price hikes this year.
Speaking on a conference call with analysts, executives said
they were delaying price increases due to tamer overall food
inflation. They also want to replace oils made from genetically
modified ingredients and increase supplies of naturally-raised
meats before making any such a move.
McKay said she won’t stop visiting Chipotle if prices go up,
but depending on the increase, “I may not get a soda or chips.”
(Additional reporting by Martinne Geller in New York; Editing
by Jilian Mincer)
