In a situation vaguely resembling the California gold rush, almost everybody is looking to cash in on the fast-casual pizza business, and they have a shared goal: to become the "Chipotle of Pizza." Chipotle Mexican Grill (NYSE:CMG) recently entered the conversation by announcing a partnership with Pizzeria Locale.
The Chipotle of Pizza is an extremely prestigious and unclaimed title. At this stage of the game, the winner could be anybody...anybody that is, except Chipotle.
What does "the Chipotle of Pizza" even mean?
To fully understand what's at stake, we need to grasp what the "Chipotle of Pizza" means. Simply put, Chipotle has changed the restaurant industry by raising the bar in several important categories. The three most important are:
- Superior ingredients
- Operational excellence
- Unbelievable growth
Americans are becoming more conscious of where their food comes from, and demanding more quality ingredients than ever. A 2012 study by research firm Scarborough found that "health-conscious consumers" -- those who use the gym and buy local organic food -- had risen to 9% of the US adult population. Additionally, the study found that 74% of these people still eat fast food.
Therefore, there's a growing segment of consumers who are searching for better fast food. The same study found these consumers were 16% less likely to eat at McDonald's and 120% more likely to eat at Chipotle than their non-health-conscious consumer counterparts. Chipotle's better fast food image is largely due to its commitment to use GMO-free ingredients.
Beyond superior ingredients, Chipotle runs a tight ship. It had a 6.2% comp-sale increase last quarter -- a quarter when the rest of the restaurant sector struggled. The bulk of this increase was attributed to higher customer throughput. Chipotle's throughput strategy grew transaction count by roughly five transactions at lunch and four transactions at dinner. Multiply this efficiency by 1,500+ locations and it was a killer quarter.
Finally, Chipotle has grown at an unbelievable pace. In 2006, the company had 500 locations. In just seven years its unit count has tripled. This coming year it plans to open between 180-195 new units for around 12% unit growth.
Whoever can replicate these three things in the pizza business will be crowned the Chipotle of Pizza.
Why the Chipotle of Pizza could be anybody
The landscape is littered with contenders vying for this title, but none currently have more than 30 locations, which indicates that the space is still up for grabs. Consider Blaze Pizza, owned by privately held Wetzel's Pretzels. Started in 2012, the chain has around 15 locations, but it claims to have 150 in the works for 1,000% unit growth. There's also Uncle Maddio's Pizza Joint with 17 locations. Founded in 2010, this chain also claims to have 150 locations in the pipeline for 882% unit growth. Some other contenders include Pizza Inn's Pie Five concept and Smashburger's Live Basil concept.
Don't count out the big chains either. Domino's Pizza (NYSE:DPZ) may not be creating a new restaurant concept, but it is keeping its eye on the segment. Frankly, Domino's doesn't see the need to enter the fast-casual space right now. In the first-quarter 2013 conference call, CEO J. Patrick Doyle said, "If you look at fast casual, largely it's defined as better quality, better tasting and we think we have that." It's hard to argue with his logic. Since revamping its recipes in late 2009, Domino's has more than doubled its net income.
Should Domino's situation change, it could easily jump into this growing segment. However, I believe the most promising chain is Buffalo Wild Wings's (NASDAQ:BWLD) PizzaRev concept. Although this partnership started as funding and moved to franchising, I believe Buffalo Wild Wings will buy out the PizzaRev concept this year -- after it's assured itself that it can operate the pizza chain efficiently. With a company infrastructure already in place at the over 1,000 Wild Wings locations, the company will be able to roll out company-owned PizzaRev locations at breakneck speed.
Why it's not Chipotle
Many Chipotle investors are ecstatic because of the announced partnership with Pizzeria Locale, because they see it as Chipotle's way to enter and eventually dominate the space. Here's why you need to interpret this news the exact opposite way.
Chipotle recently began rolling out its second concept: ShopHouse. In the third quarter conference call, an investor asked CEO Steve Ells about eventual third and fourth restaurant concepts. Ells responded that, "while it would be exciting," right now the company is focused on "just doing a few things, and doing them very very well." To take off running with the Pizzeria Locale concept just two months later just doesn't fit.
What's more, partnering with an existing chain is contrary to Chipotle's business plan historically. With the company's extraordinary $300 million cash position and zero debt, it's been within its means to acquire restaurants. However, it prefers to develop concepts in-house, as evidenced by its decision to develop the unique ShopHouse concept instead of buying out a similar company like Noodles & Company.
If anything, by partnering with Pizzeria Locale, Chipotle is conceding the fast-casual pizza space. Since Chipotle will not be getting in itself, it would rather assist a kindred restaurant company's success. If you're hoping for a boost to Chipotle's bottom line, don't expect it to come from pizza anytime soon.
Freshly baked conclusion
Chipotle has a lot of good things going for it with its current two concepts, and without a doubt it has some third and fourth concept ideas percolating somewhere in its head to develop once the growth of the Chipotle and ShopHouse concepts slows. The future growth for the company looks great, just don't factor a pizza chain into your valuation of the company at this time.
Fast-casual pizza is something that is happening now, and someone will win big. However, only when a chain has mastered superior ingredients, operational excellence, and healthy sustainable unit growth can there be a Chipotle of Pizza.
Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.