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Chipotle Adds Spice to Its Restaurant Lineup

Chipotle Mexican Grill (NYSE: CMG  ) has had a remarkable run over the past five years, despite being essentially a one-trick pony. Chipotle has cultivated a loyal customer base who are willing to pay a slight premium for high-quality food (mostly burritos, tacos, and salads) that's ethically sourced. The company's rapid growth has led to strong returns for early investors.

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Chipotle Mexican Grill 5 Year Price Chart, data by YCharts

Two years ago, Chipotle began testing a new concept restaurant, ShopHouse Southeast Asian Kitchen, with one location in Washington, D.C. The restaurant offers a "Chipotle-style" take on Asian cuisine. Apparently, Chipotle now thinks the ShopHouse concept is ready for prime time, because the company announced this week that it has signed leases for four new ShopHouse restaurants, in addition to three that are already under construction.

ShopHouse grows
At present, Chipotle still operates just one ShopHouse Southeast Asian Kitchen restaurant, located near Dupont Circle in Washington. A second D.C. location is expected to open soon. Last year, Chipotle announced plans to bring the concept to Los Angeles as well. The first two L.A. incarnations of ShopHouse will open "in the coming weeks."

On Monday, Chipotle announced plans to add four more restaurants within the two test markets of Washington and Los Angeles. One will be in the Westwood neighborhood of Los Angeles (right near the UCLA campus), one will be in D.C. proper, and two will be in suburban D.C. -- specifically, Bethesda and Rockville, Md.

Chipotle was careful to state that the announcement doesn't imply an acceleration of ShopHouse's growth. While Chipotle will grow the concept from just one operating restaurant today to at least eight by the end of next year, that will still constitute well under 1% of the total store base. Furthermore, Chipotle plans to open 165 to 180 new restaurants this year, so ShopHouse also represents a small proportion of the company's growth.

Expanding the addressable market is good
While Chipotle is still adding dozens of new restaurants every quarter in the U.S., at some point, it's going to start saturating the market. Chipotle has slowly begun to expand internationally, and it operated 11 stores outside the U.S. as of the end of 2012 -- five in Canada, five in the U.K., and one in France. However, consumers haven't caught on to the Chipotle concept as quickly in Europe as they did in North America.

ShopHouse provides Chipotle another avenue to grow after it begins to saturate the U.S. market with Chipotle locations. Chipotle already dominates the fast-casual Mexican market segment, but it competes indirectly with other fast-casual restaurants such as Panera Bread. Plenty of customers want to vary their diet even if they like the "fast casual" concept, and so they might opt for Panera or Panda Express the day after getting lunch from Chipotle.

Creating a restaurant with a similar experience but a different type of cuisine, like ShopHouse, gives Chipotle an opportunity to capture more of the food budget from its core customers. If ShopHouse could eventually grow to the same scale as Chipotle, it would vastly increase the company's overall long-term growth potential.

Foolish bottom line
ShopHouse Southeast Asian Kitchen will still be a small start-up within Chipotle even after its recently announced expansion, but its success could have big implications for the company. For shareholders, proof of the concept is more important than near-term growth. The potential game-changer is ShopHouse's long-term growth potential, as it could one day take over as Chipotle's primary growth driver.

Having two successful concepts would vastly increase Chipotle's ability to grow beyond this decade. Clearly, the company likes what it has seen from the first ShopHouse restaurant, since it is signing leases for multiple new units before the second restaurant has even opened. If these additional locations perform just as well, shareholders should expect to see a nationwide rollout begin by the middle of the decade.

Chipotle's stock has been on an absolute tear since the company went public in 2006. Unfortunately, 2012 hasn't been kind to Chipotle's stock, as investors question whether its growth has come to an end. Fool analyst Jason Moser's premium research report analyzes the burrito maker's situation and answers the question investors are asking: Can Chipotle still grow? If you own or are considering owning shares in Chipotle, you'll want to click here now and get started! 

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9/30/2016 2:55 PM
CMG $426.05 Up +5.32 +1.26%
Chipotle Mexican G… CAPS Rating: ****