By James DeTar
Investor’s Business Daily
April 7, 2016
Chipotle Mexican Grill‘s (CMG) move to trademark “Better Burger” didn’t just signal a possible new burger chain. It also underscores that Chipotle’s core business may have peaked.
Chipotle is just starting to recover from a slew of E. coli and norovirus outbreaks at several of its restaurants late last year, with the Centers for Disease Control and Prevention ending its investigation on Feb. 1. Same-store sales plunged 14.6% in the fourth quarter and were down 26% in February. Chipotle has predicted it would report its first-ever quarterly loss in Q1.
The burrito giant should see a rebound in sales. But Chipotle’s growth was decelerating rapidly, even before the food illness outbreaks. And other industry data also suggest that demand for Mexican food generally is no longer outpacing other types of cuisine.
Chipotle is the king of fast casual eateries, as well as the clear leader among similar Tex-Mex chains, such as Jack In The Box (JACK)-owned Qdoba Mexican Eats, privately owned Freebirds World Burrito and more.
But the Mexican restaurant sector is maturing, while upscale burger chains are growing in popularity, according to market tracking firm Technomic’s President Darren Tristano.
“When we looked at the market in 2015, sales in the (upscale) ‘better burger’ category grew 15%. Mexican slowed down to only 7% or 8%,” he told IBD. Mexican restaurant growth had also been in the double digits.
Take a look at the figures for high-flying burger chain Shake Shack (SHAK). There, sales rose 47%, but that was just $51 million compared with Chipotle’s revenue at just under $1 billion in the fourth quarter.
Chipotle needs to continue diversifying to grow, Tristano said.
“When you have such large sales growth, it has to slow down. We saw that with a lot of other fast casuals too,” he said.
Sandwich and bakery chain Panera Bread (PNRA) used to enjoy double-digit and then high-single-digit same-store growth. But in the fourth quarter, that was reduced to 3.4%.
It’s not surprising that Chipotle’s growth has faltered, but what is astounding is that it stayed so high for so long. In the fourth quarter of 2013, Chipotle’s same-store sales rose a robust 9.3% vs. a year earlier. But comparable growth then accelerated every quarter until it peaked at 19.8% in the third quarter of 2014.
“It was just getting bigger and bigger a few years ago,” Argus Research analyst John Staszak said. “Comparisons were getting more difficult.”
Same-store sales growth cooled to 16.1% in Q4 2014, then to 10.4%, 4.3% and 2.6% in the first three quarters of 2015, respectively. Some of that was due to carnitas shortages as the company sought more humane suppliers.
Another factor to consider is that Chipotle’s food-illness woes haven’t necessarily helped rivals. Jack-In-The-Box’s Qdoba reported same-store sales growth slowed to 1.8% in its latest quarter, down from 14% a year earlier.
Total U.S. Mexican restaurant sales grew at a 2.9% annual rate from 2010 to 2015, when they reached $38 billion, IBISWorld said in a report. The market tracker forecasts growth will slow to 2.5% a year for the 2015-2020 period.
Further, Chipotle and its peers are losing ground when it comes to satisfying the public’s appetite for hotter cuisines. Diners still love spicy foods, but that’s expanded beyond Mexican and Asian dishes to fare such as KFC’s spicy chicken wings and Restaurant Brands International (QSR)-owned Burger King’s “Angriest Whopper,” which features hot sauce in the bun.
“People looking for spicy foods might be headed for a Mexican restaurant, but there are many other choices for Americans now,” Tristano said.
Chipotle has already expanded into the Asian food sector with its ShopHouse Southeast Asian Kitchen restaurants, though it hasn’t rapidly increased those locations. It’s dipped its toe into the fast-growing custom pizza sector by investing in the Locale pizzeria chain.
Despite slowing growth, analysts are still bullish on Chipotle.
“There is still strong association with the Chipotle brand. People have very short memories” for health scares, said Bonnie Riggs, restaurant analyst for market-tracking firm NPD Group.
Chipotle’s Growth Options
In addition to eyeing the high-end burger sector, Chipotle at the end of March began testing an expanded drinks menu at a store in its home city of Denver as another way to regain customers and boost same-store sales and margins. Some analysts still see an opportunity to expand into breakfast.
And the biggest mid-term source of growth is simply creating more Chipotle locations. The company added 192 stores in 2014 and 229 locations in 2015, with 220-235 planned in 2016.
Investors can take heart, however. A restaurant operator that is maturing doesn’t necessarily mean a death knell for the stock. Investors can, and usually do, reset expectations.
Take a look at Panera, which is trading at-all time highs. There’s also the fast-food king, McDonald’s (MCD), which has rebounded to record highs, largely over excitement that U.S. same-store sales have turned positive following a long slump.
And don’t forget that expanding into burgers would bring some symmetry to Chipotle’s story. McDonald’s, home of the Big Mac, was a big Chipotle investor before divesting its stake.