Are American Food Chains Like McDonalds and Chipotle Mexican Grill Losing Their Religion?

McDonald's (NYSE: MCD  ) is serving wraps and wings. Olive Garden of Darden Restaurants (NYSE: DRI  ) is serving hamburgers. Chuck E. Cheese of CEC Entertainment is serving beer. Burger King is serving veggie sandwiches. Now Chipotle Mexican Grill (NYSE: CMG  )  has moved away from its identity by serving pizza at a new chain. Is this a wise move or a sign of struggle?

Pizzeria Locale
Chipotle announced on Dec. 18 that it has "partnered with restaurateurs Bobby Stuckey and Lachlan Mackinnon-Patterson" to launch a fast-casual pizza chain called Pizzeria Locale. The goal is to model the pizzerias similarly to the Mexican Chipotle chain "with high-quality ingredients accessible to everyone."

Chipotle isn't exactly struggling as it is. Last quarter it reported revenue that exploded 18% to $826.9 million. Same-store sales jumped 6.2%. Net income rocketed 15.3% to $83.4 million while diluted earnings per share leaped 17.2% to $2.66.

CEO Steve Ells credited the success to simply "sourcing the best possible ingredients and cooking them according to classic cooking techniques" which "continues to resonate with our customer." This may beg the question -- why fix what isn't broken? Well, the answer may be simple. The pizza chain will exist separately from the Mexican Grill itself so there isn't much risk as far as Chipotle is concerned. Pizzeria Locale will have its own identity and brand backed by Chipotle's management.

The Chipotle way versus McDonald's
This strategy is much different than what other restaurants are doing. McDonald's, for example, launched its McWraps and Mighty Wings in-house. McDonald's is attempting bold moves as it struggles to grow against what CEO Don Thompson describes as "ongoing competitive activity and relatively flat industry traffic trends." Its Mighty Wings may have even backfired.

McDonald's U.S. same-store sales were up 0.7% in the third quarter, the quarter that Mighty Wings launched. After that, October same-store sales were only up 0.2% and in November they actually fell by 0.8%. McDonald's has been disappointed with the Mighty Wing launch so it's not inconceivable that the not-so-overly popular wings have turned away some customers from the brand. Chipotle takes on less risk by launching pizza outside of its core chain.

The Garden of Darden
Meanwhile, Darden Restaurants put an Italiano Burger on its lunch menu. While this launch stayed within the Olive Garden chain, it poses a lower risk of hurting the brand as it was stuck to the lunch menu. Unlike Chipotle Mexican Grill, the numbers Darden Restaurants has reported for Olive Garden have been very unimpressive so the company can afford to -- and maybe even has to -- take some risks.

Last quarter, Darden Restaurants saw sales hop up 6.1% while same-store sales at Olive Garden took a 4% dive. Since 39% of the restaurants under Darden Restaurants' umbrella are Olive Garden locations, it's important to try new things to get growth back.

Foolish final thoughts
It's a smart idea for Chipotle to add pizza fuel to its already raging inferno when it comes to growth. The risk is low as the company only has immediate plans to open two more restaurants. If things work out, Chipotle can become a double-growth story as it rapidly expands its pizza chain side-by-side with its Mexican Grill chain. If the pizza chain turns out to be a flop, there would be little harm done. In the meantime, this should at least potentially add an additional speculative premium to the stock price. Fools looking for value plus a bit of speculation may want to take a glance at Chipotle Mexican Grill for 2014 and beyond.

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  • Report this Comment On December 23, 2013, at 11:07 PM, ScamuelJones wrote:

    Darden Restaurants (Olive Garden, Red Lobster, Longhorn Steak House, Bahama Breeze, etc.) is the restaurant group that would NOT allow the U. S. flag to be displayed in the Olive Garden during civic club meetings by outside civic groups holding meetings there. They sound to me as if they are anti-USA, anti-American, anti-Christian, and pro-Muslim as well being run by a bunch of socialist liberals who see themselves as P. C. morons who do not want to "offend" any of the groups that are socialist and pro-communist! I don't patronize these anti-U. S. people, and I highly recommend the same approach to all!

  • Report this Comment On December 24, 2013, at 10:39 AM, Icthelite wrote:

    McD's mighty wings were not all that great. Tried them once, that was enough for me

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