Why Chipotle Should Be in No Rush to Expand ShopHouse

With Chipotle Mexican Grill's burrito business still in high gear, the company has the gift of time to develop its Asian-inspired ShopHouse fast-casual concept.

Mar 4, 2014 at 1:22PM

Chipotle Mexican Grill (NYSE:CMG)investors are no doubt champing at the bit for the company to expand its fledgling ShopHouse Asian-inspired fast-casual endeavor. It's been more than two years since the first ShopHouse restaurant opened in the Washington, D.C., area, and despite word from management that the concept has been well received, the company has added only five ShopHouse locations since.


Source: Chipotle.

Meanwhile, key competitor Noodles & Company (NASDAQ:NDLS) is expanding across the U.S. Last week, the company reported 17% revenue growth from 2012 to 2013. It added 53 new restaurants in 2013, bringing the total number to more than 380 locations. Plans for 2014 include the addition of between 52 and 65 new stores.

With Noodles' expansion heating up, and ShopHouse still on the back burner, it's reasonable for investors to question if Chipotle is taking the right tack with its own noodle-centric venture. But there are a few good reasons investors should relax and let Chipotle take its time.

Things are good in the burrito business
Chipotle's Mexican-themed restaurants are still chugging along very well. Fourth-quarter sales were up 21% over the prior-year period. Even better, same-store sales last quarter were up 9.3%, indicating that the U.S. burrito market is very far from being saturated. Investors can expect more growth from the chain.

That same-store figure dwarfs the 4.3% same-store number a much less mature Noodles reported for the same quarter. With Chipotle still growing at the rate it is, investors don't need yet to look for the offshoot to start making any meaningful contribution to the top or bottom line. This is a time for Chipotle to experiment, to tweak and fine-tune, and to map out strategy to eventually grow the Asian-inspired concept.

What's more, with its growing Chipotle footprint, the company is figuring out what works and where for 1,600 sites in the U.S. As Chairman and Co-CEO Steve Ells told analysts: "We know exactly what regions, what markets, what intersections we would want to go to with these new concepts."

Once the company does get the ShopHouse concept rolling, it can do so quickly.

Management has a great track record
What Chipotle has accomplished to date is impressive. It's built out a chain that rivals fast food in terms of both speed and price. But in terms of quality, it stands head and shoulders above McDonald's, Wendy's, and Yum! Brands' (NYSE:YUM) Taco Bell.

Remember that concern in 2012 about Taco Bell eating Chipotle's lunch after it delivered stronger-than-expected sales on the back of the introduction of its Cantina line of pricier tacos and burritos? Yum! had brought on celebrity chef Lorena Garcia to endorse the new, healthier menu, and it looked like it could be a formidable opponent.

That threat to Chipotle proved to be short-lived. While Cantina no doubt helped to improve Taco Bell's image with certain potential customers, the Cantina menu in 2013 made up only about 4% to 5% of sales. Investors who stuck by Chipotle and its management were rewarded handsomely – especially if they were smart enough to pick up shares at the peak of concern.

Food with integrity works
Perhaps most important, Chipotle is successfully carrying out its "food with integrity" mission while remaining competitive with the fast-food chains. It delivers burritos, tacos, and salads made with meats from animals raised outdoors, free of hormones and antibiotics. It shoots to source ingredients locally when possible, and chooses organic when the choice is there.

Customers are buying into it, and Chipotle's clever marketing -- from its Scarecrow game to its new Farmed and Dangerous sitcom – is increasingly built around it. Here's some of what Ells had to say in the earnings call:

What I think is really important is that more and more of our customers are telling us that it's very important to them. They're interested in where their food comes from and how it was raised, and they want to be sure that they are feeding their families healthful, nutritious, raw ingredients ... I think when you combine that with food that's absolutely delicious ... I think you have a winning formula.

The Foolish bottom line
There's good reason for Chipotle investors to be a little impatient with ShopHouse. ShopHouse is an an exciting idea, and it it looks like a smart second act for the burrito maker. But investors should remain patient with the concept and let management guide its expansion at a rate they're comfortable with. With the Mexican-inspired stores still tapping new markets and hanging up stellar comps, there's no reason for Chipotle to rush the ShopHouse story.

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John-Erik Koslosky owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of 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.

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