Chipotle Mexican Grill Has More Room to Run

Innovative menus, new locations, and smart marketing strategies make Chipotle a good bet.

Mar 26, 2014 at 7:00AM

Chipotle Mexican Grill (NYSE:CMG) has continued its solid performance in 2014 with its shares already up 12% so far. The company has successfully warded off competition from Yum! Brands' (NYSE:YUM) Taco Bell and posted solid fourth-quarter growth with its last report. New openings and menu innovations have boosted Chipotle, and it looks well-poised for the future as well.

What's driving Chipotle
Chipotle's popularity hasn't shown any signs of fading. That fact receives support from strong fourth-quarter results that revealed handsome revenue growth of almost 21% and comparable-restaurant sales growth of 9.3%. Chipotle focused on improving its food culture and its environment to attract more customers to its food joints. Chipotle's secret sauce could be its focus on providing an unusual dining experience to its customers by introducing new ingredients to its menu, along with its classic cooking style.

In addition, Chipotle is working toward removing all of the GMO ingredients from its food. Further, the company has added Sofritas to its menu to attract more vegan and non-meat eaters to its joints. Chipotle plans to eliminate GMO ingredients from its corn and tortillas and serve food made completely with non-GMO ingredients by the end of this year. 

The introduction of Sofritas has been a success, as the item contributed about 3% of the company's total sales. Chipotle made this addition with vegetarians and vegan customers in mind, but the company has also managed to attract many meat eaters with this item as meat eaters place 40% of the Sofritas orders. Encouraged by this performance, Chipotle continues to make Sofritas available at more locations. 

Moving on, Chipotle has aggressively invested in marketing initiatives to make customers aware of its non-GMO products. As a result, it has come up with a Scarecrow marketing program which includes a three-minute short film and a game. The program has seen 12 million online views and 6 million game downloads, and it has improved customer engagement.

Chipotle also focuses on local markets through the "cultivate festivals" it has held in San Francisco, Dallas, and Minneapolis, which brought in 100,000 attendees last year. With this strategy, the company made customers aware of its unique food and cooking style as well as the fine-dining experience that it provides.

It has also opened a concept known as ShopHouse, which provides the same dining experience as does Chipotle but with an Asian theme. Further, the company has invested in Pizzeria Locale. As customers want their orders quickly, Chipotle has come up with an oven made of Italian wood that can cook pizza in less than two minutes. In addition, Chipotle will open 185-190 new restaurants in 2014 as it expands its reach across more markets and brings more customers into its fold. 

Yum!'s moves
With such efforts, Chipotle has successfully answered the challenge of Yum! Brands' Taco Bell. However, Yum! hasn't sat idle and it has made some moves to strengthen Taco Bell. Taco Bell made efforts to diversify its product offerings. The company is improving its morning service by introducing the new Breakfast Menu. The breakfast menu will include 15 new items and it will be available from 7 a.m. to 11 a.m.

This addition is important for two main reasons. First, Taco Bell will now open two hours earlier which will allow it to serve more customers and help the company compete against the likes of McDonald's (NYSE:MCD). Second, the restaurant industry has witnessed 3% growth in morning visits while visits in other periods declined. 

However, efforts to freshen up the menu don't always pay off. For instance, take a look at McDonald's. The company introduced chicken wings priced at $1 per wing to compete against KFC's very own wings, which cost $0.20 less. As a result of this price difference, consumers shunned McDonald's chicken wings, and the company now sits on 10 million pounds of unsold chicken.

The fiasco didn't end there as McDonald's made another mistake by adding smoothies, wraps, salads, and apple slices to its menu. Customers obviously don't visit fast-food joints to eat apples and salads, which led to the failure of the "Dollar Menu." Consequently, McDonald's same-store sales for the U.S. dipped 1.4% in the month of February. So, even though Yum! made moves to grow its sales by innovating its menu, success isn't guaranteed. Meanwhile, Chipotle already sees success with its own menu, so it might be able to perform better.

Takeaway
Chipotle has begun 2014 where it left off last year. New menu additions, smart marketing strategies, and more locations open have resulted in strong tailwinds that should drive Chipotle's performance going forward and make it a worthy investment.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool 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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