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Chipotle, Taco Bell Head-to-Head: No Contest

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Although anecdotal evidence is never the be-all and end-all, one factor of investing in retail stocks is the mix of fun and function. Take the simple observations one can make in, say, a shopping mall. Peter Lynch said, "Invest in what you know," and there's something to be said for an investing sector in which some research can be conducted in person.

I watched for some interesting data during a recent retail check at a major upscale mall near Fool HQ. Given retail's slew of disappointing quarterly results recently, it's time to look around.

Granted, my mall visit wasn't optimal: It was daytime during a week when many kids had already gone back to school, but still, plenty of mall wanderers and super-sale signs at retailers gave me an idea of what's moving and what's not.

I like to look at bags. Maybe that sounds a bit creepy, but I do try to notice if shoppers bought anything and, if so, which stores seemed to have charmed them. The weirdest thing is, although it was about 2:30 in the afternoon, the bag that was by far the most popular in a crowd of shoppers who hardly possessed bags from the neighboring retailers was a shocker: Chipotle (NYSE: CMG  ) .

Attention shoppers... and stock watchers
From checking out the food court from near and far (from an upper-tier vantage point, and fine, I also did sit down and have a burrito bowl for sustenance for the walkabout), I noticed the vast majority of people in the court were carrying, or had set, Chipotle bags at their tables. Other fast-food competitors' bags or trays were few and far between.

Food court competitors at this particular mall include major options: McDonald's (NYSE: MCD  ) , Popeye's, Panera, Subway, Johnny Rockets, as well as several quick-serve names I'm not familiar with, like Harry's Smokehouse Burgers & BBQ.

Most interestingly, though, Yum! Brands' (NYSE: YUM  ) Taco Bell is basically right next to the Chipotle in that particular food court. Taco Bell had no substantial line, and just a few customers trailing to its counters once in a while. Sorry, David Einhorn and other Chipotle skeptics, the thesis that Taco Bell would or even could steal market share from Chipotle appears to be just as outlandish as many of us believed.

Viewing customer traffic from this side-by-side vantage point was eye-opening. If anyone's stealing market share in this Mexican match-up, it appears to be Chipotle.

Keeping an eye on growth
It's worthwhile to go back to brave the hardcore weekend throngs of mall crawlers to collect more data. Still, for whatever reason, this particular Chipotle and its burritos were going like gangbusters. In addition, the burrito-making team was incredibly swift and efficient. They have to be, for lines like that.

Anecdotal evidence is never enough for a full investment thesis. However, it can at least bolster one's visual sense of a business's performance. And some of the Chipotle-centric behavior I observed certainly segues with recent quarterly results.

Chipotle's recent results have reestablished it in investors' good graces after it got slammed by Einhorn's Taco Bell thesis. Just last quarter, Chipotle's same-restaurant sales increased 5.5%, and total revenue increased 18.2%. Net income jumped 7.6%.

According to Yum!'s most-recent quarterly results, also released in July, Taco Bell did report same-store sales growth in the U.S., but it's not incredibly impressive at 2%.

Chipotle's former parent McDonald's has been in a longtime trough. Its most recent quarterly results paled in comparison to Chipotle, too, and it's well established that it needs a turnaround. Obviously, we do know that McDonald's is a profitable company and a dividend payer, but if growth gets choked, that's a problem for the investment. Its same-store sales rose an incredibly anemic 0.7%.

Hungry for long-term winners
For many self-identified value investors, Chipotle's valuation likely looks appalling at 32 times forward earnings. Yum! Brands and McDonald's certainly look cheaper in the fast food realm, at 19 and 16 times forward earnings, respectively.

However, Chipotle appears to be as popular as ever, and recent numbers back that up. Other fast-food rivals are struggling for growth, and what may look like relative bargains may indeed prove to have been expensive at these levels over the long run. Chipotle's a keeper, and even a buy for long-term investors; buying on the Einhorn-sparked dip ended up being a great way to get a real bargain. Quality companies pay off over the long run.

Some analysts have more positive views of two of the companies in this article. The Motley Fool's free report, "3 American Companies Set to Dominate the World," makes the case. Click here to get your free copy before it's gone.

Read/Post Comments (29) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2013, at 5:01 AM, bourse wrote:

    anecdotal evidence is just an excellent method, no doubt!

  • Report this Comment On September 06, 2013, at 8:17 AM, newton01 wrote:

    The problem with this observation is that the target audiences of the two companies are vastly different. TB targets men from the college years to middle aged who are not part of the "whole foods" crowd. The TB crowd is not likely to "linger" at a mall setting, but buy what is needed or wanted to leave quickly.

    As for taking market share, the roll out of the cantina menu has not been a success story yet and is still a work in progress.

    Overall given the valuation on a three part DCF model for CMG, it is still overvalued albiet with short term momentum on it's side. YUM assuming a GDP growth rate of ~3% and a cost of capital at historical treasury rates of ~5% is also overvalued. Current valuations show a "don't buy" rating from a Warren Buffett approach.

  • Report this Comment On September 06, 2013, at 8:38 AM, wredfern wrote:

    Newton --- YOu are completely off on what chipotle's target market is. Yes, initially they relied on those looking california style burritos with organic elements, but the customer base is far beyond that now. Go to a Chipotle in a diverse area and you will see African-Americans who used to eat at other fast food places, older people, children, etc. It is not going after the granola crowd by any stretch. I doubt there are many groups that are not going there. Your point about it being overvalued is true for both.

  • Report this Comment On September 06, 2013, at 11:09 AM, arodmargarita wrote:

    I love Chipotle and the chicken burrito bowl from Chipotle is 10 x better that the one from Taco Bell.

  • Report this Comment On September 06, 2013, at 12:22 PM, rianjones1983 wrote:

    in greater detail CMG Q2 2013 Transcript @

  • Report this Comment On September 06, 2013, at 1:04 PM, GrahamLower wrote:

    I think the higher rent in a mall naturally benefits Chipotle and could explain the traffic pattern to some degree. While also anecdotal, I've observed the general cost of going to Taco Bell is less than that of Chipotle. A lower price is suggestive that Taco Bell customer are value based, which would then have two effects: 1) More potential Taco Bell customer simply choose to eat outside the mall, and 2) The 'value' driver is much less stronger because of the rent premium, leading to bleed from Taco Bell to Chipotle.

    #2, in other words: the comparable meal that cost $6.25 at Chipotle, costs $5.00 at Taco Bell normally, a 25% premium, now costs 9.58 (6.25 + 3.33) and 8.33 (5.00 + 3.33) respectively, a 15% premium. A customer who think Chipotle tastes 20% better, is more likely to go to Chipotle instead of Taco Bell because it is the better value.

    Note: this assumes identical nominal costs per order, which is only likely only if they get the same number of orders (we'll assume similar rents as well). With the traffic pattern, things are actually more in favor of Chipotle (more orders to spread the cost), magnifying the effect of #2.

  • Report this Comment On September 06, 2013, at 2:00 PM, GrahamLower wrote:

    wredfern -- While I find market argument newton01makes less than compelling, I would think the "whole foods" crowd is generally more unavailable during this window mitigating much of the behavioral impact, I find it very interesting that you used "African-Americans" as the counter to "the granola crowd".

  • Report this Comment On September 06, 2013, at 3:35 PM, southernshark wrote:

    Taco Bell is more of a value play. I suspect it does much better in the stand alone stores, and also in the night time market (after Chipolte is closed). Also, as mentioned already, the line might be shorter at Taco Bell because food delivery is much faster. Its food requires less prep time basically. So a customer can come in, get their Chalupas and go on their way, while the Chipolte customer is still waiting for their food.

    Additionally, Taco Bell has made big inroads into foreign markets. I saw Taco Bells all over Guatemala City and it was always packed.

  • Report this Comment On September 06, 2013, at 5:58 PM, PositiveMojo wrote:

    I'm not surprised about Chipotle. I'm 90% vegetarian and eat no wheat or dairy and I go to Chipotle all the time.

    I can get a great salad with brown rice, black beans, corn and guacamole, and my friends can order whatever they want with chicken, beef or pork.- - with wheat tortillas, cheese and sour cream.

    It's a great place that caters to the diets of a wide range of people. They are also very efficient in their setup and operation and have been one of my stock picks for quite a few years.

  • Report this Comment On September 06, 2013, at 6:17 PM, rocky3071 wrote:

    Comparing Chipotle and Taco Bell is like apples and oranges. But neither have authentic Mexican tastes. I wonder where your "survey" was conducted? Chipotle has such a limited menu that can be tiring after a short time. Even within the 'burritos' you have healthfood style beans with accompanying bland taste which combine with other equally tasteless rice and other fillings that just cannot be aided by the selection of hot sauce. But then I do not go to Taco Bell for Mexican either. Both are uniquely different food groups which the public may accept or reject in time. At least TB has a track record.

  • Report this Comment On September 06, 2013, at 6:24 PM, earlebower wrote:

    After your recommendation, I checked out the Chipotle menu on line. Very high levels of salt and fat in the food. I was going to go to a local outlet but decided the food was too unhealthy for me. This may have absolutely no impact on the shares, but I think it would be smart for them to make their food more healthy. An 800 calorie burrito with nearly 2,000 grans of sodium isn't very appealing.

  • Report this Comment On September 06, 2013, at 6:29 PM, Sedimentary wrote:

    This definitely flies contrary to what I have seen in the mall near me. And it has a fairly affluent clientele which seem to cater quantity-wise to Taco Bell! Now mind you, I prefer the quality which Chipolte affords, however practicality (whether my kids are with me or not) pushes me towards TB. When I need a Mex fix I head over to TB and drop 6 to 9 dollars no problem. Hot and run and fills the need.

    Now if quality and ingredients is your watermark, Chipolte should thank their lucky stars that Moes Southwest Grill doesn't trade publicly. They would trounce them hands down in every category, and when the day should come that they have an IPO, I will gladly put my faith in them!

  • Report this Comment On September 06, 2013, at 6:40 PM, GaryDMN wrote:

    Qdoba competes with Chipotle and I prefer them. Not sure if they are nation wide, but they have them in the mid-west and are owned by Jack-in-the-Box, which I've never seen outside the west coast. TacoBell is fast food, Qdoba and Chipotle are Mexican southwestern grills.

  • Report this Comment On September 06, 2013, at 6:51 PM, SwiperFox wrote:

    My anecdotal evidence is that it's all crap. I'll stick with Roberto's in San Diego and Taco King in LA.

  • Report this Comment On September 06, 2013, at 6:52 PM, michda00 wrote:

    Observing a business is a good idea. I have noticed that McDonalds' customer service has been slipping over the last year or so. I travel to different states and my observation has been consistent. The lines are confused, people are waiting for their orders and the people wanting to order end standing behind the people who have already ordered; the order taker sometimes gives the customer a beverage cup, sometimes not which sometimes results in a customer getting 2 cups or no cup. Orders do not come out in sequence so you may wait a long time while watching recent customers get served. Orders are incorrect; some workers are standing around while others are humping. The trash bins are not consistently emptied; and the restrooms are messy.

    I have been watching same store sales and the stock price and these are consistent with my observations. I do no go to McD's as often as before.

    I also am not a buyer of this stock.

  • Report this Comment On September 06, 2013, at 7:29 PM, Ulaq27 wrote:

    @earlenower Your assessment of the menu may be correct. Are you saying that you would rather eat at TB? For equal calories, is the food healthier, ie lower in sodium and lower in fat?

    Is Chipotle the healthiest? There may be other Mexican grills that use less sodium and more organic proteins. Do I eat TB? Yes. When I feel like abusing my body. But I would guess that people in general feel better about eating a Chipotle Burrito rather than eating off the dollar menu at TB McD. And this is why Chipotle wins. People no longer have to stand for bad food in the quick service segment.

  • Report this Comment On September 06, 2013, at 8:26 PM, somethingnew wrote:

    I think anecdotal evidence is good to some degree and I still practice it on most companies I buy shares of stock in but I have to agree with others that comparing TB to CMG is pretty much comparing apples to oranges. There is a slight cross over in food similarities but not by much in TB's cantina grill. I like the cantina grill but it is no Chipotle. On the other hand, I'm not a fan of Chipotle either and think that they taste like just about every mom and pop non-authentic Mexican restaurant I've ever been too as well as the bigger ones like Moe's. I'm also in a different crowd though and prefer the artificial taste of 50 cents Jack in the Box tacos as well as the grease filled Locos tacos at Taco Bell. I could afford to eat at Chipotle every week I just don't see anything special about them. If I'm going to eat REAL Mexican food though, I'm going to family owned El Pueblitos with Mexican grocery store attached where when I walk in I'm surrounded only by Hispanics and they have a lot of stuff on the menu that doesn't cater to Americans at all. That's how you know it's authentic Mexican food.

  • Report this Comment On September 06, 2013, at 10:49 PM, pkguitarman wrote:

    And at this authentic Mexican restaurant I would be willing to bet that the average weight of the customers is at least 30% higher than the customers of Chipotle. Probably true for Taco Bell customers also.

  • Report this Comment On September 07, 2013, at 12:33 AM, somethingnew wrote:

    @pkguitarman Lol, very true. Besides being one of the only caucasions that frequents the restaurant I'm also one of the only underweight people eating there as well. To their credit they do have some healthy choices and the food is definitely fresh though.

  • Report this Comment On September 07, 2013, at 11:44 AM, will1946 wrote:

    Chipotle is over-valued and due at some point for a correction.

  • Report this Comment On September 07, 2013, at 1:16 PM, johnnyAfella wrote:

    I don't know what mall you were observing, but from my vantage point, Taco hell is ALWAYS busy at my Jersey shore town. You can't get out of Chipotle for under $10, but you can feed a family at Taco for the same price...I guess it's the demographics!

  • Report this Comment On September 07, 2013, at 4:16 PM, jekoslosky wrote:

    Alyce, my experiences at Chipotle made me look at the stock. The restaurants run like machines. Even long lines move quickly, and service has almost always been stellar. And that's been across a few different locations. Those experiences tell me this is a company doing things right. It doesn't hurt that the food is great, either. Yeah, it's on the pricey side as a stock. But it has plenty of runway ahead.

  • Report this Comment On September 07, 2013, at 6:47 PM, gesheddc wrote:

    Until such time as Chipotle, McDonalds, and other such fast food industry companies start paying their workers a "living wage", I'm simply not interested in owning any of their stock. Not interested in profiting from labor which is paid so poorly that employees cannot adequately feed, cloth and house themselves.

  • Report this Comment On September 07, 2013, at 9:19 PM, enginear wrote:

    I feel YUM (and TB) is an old hand at marketing a new product (or line), and they've recently gone toe to toe with CMG due to the market share they see CMG getting.

    It will work for a while as the 'new' remains new, but I believe over time the old Taco bell will remain while CMG will still be growing.

    CMG andYUM are both good companies, but these two, although both 'fast food' are different.

    I don't think one is going to eat the other.

  • Report this Comment On September 07, 2013, at 10:28 PM, SandyEggoJake wrote:

    Meh. So here's the thing. The P/E multiple for $CMG got to be sky high for one reason and one reason only. Rapidly expanding margins. But of late, the company has hit the wall on margin and it has even started to fade.

    Look at your own evidence. "Total revenue increased 18.2%. Net income jumped 7.6%.". When rev grows faster than income, that means margins are falling. Never a good sign in momentum stocks. And their margin is continuing to fall as they trade growth for profits. Especially bad in the high fixed cost fast causal restaurant biz. The next phase will be nationwide advertising. It’s coming, just like it does for all national chains. And it will blow a huge chunk of earnings to keep the traffic and $/visit. But they will need to do it to keep revenues expanding faster than costs. But as the margin normalizes, the stock price will underperform its peers as well as newer restaurant fads (Noodles, Smash Burger, etc).

    Want more n=1 evidence? Look at new stores performance. It’s lagging the historics of prior new stores openings. Why? Perhaps it is due to them being forced to change their game plan. Moving beyond high rent and college towns. And in high rent areas for new stores they are ditching the in mall and strip mall locations that had been a proven winner for them, and opening more stand alone locations (e.g., La Jolla, CA). But these locations are simply not getting the same traffic. Why? Who knows. No drive through? Less foot traffic? Poor parking? What ever the reason, this trend for their new store placement is not good, and with each one opened, the visits per restaurant metric continues to be diluted. Its just the nature of the business. Up to this point they were able to keep $/visit high buy adding high priced extras (charging for add ons and specials & selling alcohol) but that game is over. That is unless they start selling "lobster with integrity", etc. Then you will know the shark has been jumped.

    There was hope that their chop house might allow them to double store count and renew some of that old rapid growth story. But as those who have visited them know, they do not live up the expectations and are getting no buzz. And so management is retooling them and tempering growth projections.

    Bottom line, the best days of $CMG are behind it. But there is one thing management could do to start to stem the coming margin crush. Start paying a dividend and keep that buyback high. Such are the only two things keeping the shorts from swamping this stock.

  • Report this Comment On September 07, 2013, at 10:44 PM, pkguitarman wrote:

    Actually, the bottom line is that many many people such as myself, like the food and service at Chipotle and would not step inside a Taco Bell. No comparison!

  • Report this Comment On September 08, 2013, at 10:54 AM, map2ndset wrote:

    This seems like an odd comparison. It's like comparing Starbucks to McDonald's coffee.

    In just coffee are people going to be more loyal to Starbucks sure. But even though we joke about how there's a Starbucks on every corner...that joke is even better with McDonald's. Even the places without Starbucks at least have McDonald's.

    That's the same here. Taco Bell would like to steal back a few customers from CMG. But really they don't have to. People that go to Taco Bell are going to go back to Taco Bell at some point. Because there are more stores, they are cheaper and sometimes you don't want to pay extra for what's really some meat & veg with mexican spices. When you want to you will. But if the kids want Taco Bell you can also pay a little extra and get a similar product there for your grown up tastes.

    CMG would love to take the Taco Bell customers away...and they do. But do they keep them? $3 at TB vs. $8 at CMG? How often will people do that?

    That's just looking the head to head. Let's not forget that Taco Bell is just one of the faces of Yum! brands. CMG is one a nice growth curve now. But Yum! is global and still growing itself. YUM pays a regular dividend. Yum has a history and a massive footprint. If the next big thing to sweep America is a noodle shop or Gyros or Ethiopian...CMG is more of the fad. Who is more likely to go away?

  • Report this Comment On September 09, 2013, at 9:46 AM, robyrob wrote:

    Taco Bell is more expensive (to eat there) than it seems because you buy 2 or 3 things. At CMG you buy a burrito and that's it. Tbell may be marginally cheaper but the food is so vastly different that eating at CMG seems cheaper to me. I'll gladly stand in line for 10 minutes rather than eat the crap Tbell is serving.

  • Report this Comment On September 15, 2013, at 7:19 PM, linmarman wrote:

    Here in the Houston area, CMG has several competitors - Freebirds and Bullritos. Basically the same thing, just smaller and more local. My family prefers Freebirds. However, we will make 5 trips to Taco Bell for every trip to the fat burrito place of choice. My 13 yr old daughter loves the dorito tacos, and I'll eat a few bean burritos. There are two TB's near my house that are well managed and get us in & out FAST. The last poster said what I experience - wait 10 minutes for the fat burrito. Just anecdotal, but so was the original article.

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9/26/2016 11:34 AM
CMG $409.07 Down -4.74 -1.15%
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