Another Chipotle Rival Bites the Dust

Ruby Tuesday's Lime Fresh Mexican Grill was once supposed to be the next Chipotle. Two years after its acquisition, that now looks like a pipe dream.

Apr 12, 2014 at 12:05PM

For years now, Chipotle (NYSE:CMG) bears have claimed that the company has no sustainable competitive advantage, saying the burrito slinger's concept is easily imitated and co-opted. Famous short-seller David Einhorn sent shares of the Mexican-food chain plummeting in 2012 when he insisted that Taco Bell's Cantina Bell lineup would swipe customers away from Chipotle. Einhorn wasn't the only naysayer. Doubleline Capital's Jeff Gundlach recommended shorting the stock a year ago, saying, "Gourmet burrito is an oxymoron."  

Chipotle seems to have gotten the last laugh, however, as shares have more than doubled since 2012 and are up over 50% since Gundlach made that statement. As Chipotle's last quarter makes clear, the fast-growing burrito roller shows no signs of slowing down as same-store sales grew a whopping 9.3%. At Yum! Brands' (NYSE:YUM) Taco Bell, same-store sales grew just 1% in its last quarter, indicating enthusiasm for the Cantina Bell lineup could be waning. Even Yum! Brands management seems bored with the higher-end offering, as its attention has now turned toward its breakfast launch. 

Chipotle

Source: Wikimedia Commons.

Who's the next contestant?
But Taco Bell isn't the only brand that was supposed to topple Chipotle. Florida-based Lime Fresh Mexican Grill was also once a promising upstart in the fast-growing burrito biz. In April 2012, Ruby Tuesday (NYSE:RT) bought the chain for $24 million to give the company more growth. At the time, there were 15 Lime locations, and Ruby Tuesday hoped to expand it to 65 by 2014. Today, there are just 28 Lime locations, however, and at least six have closed in the last year, some of which did not even stay open over a year. Many of those Lime restaurants that closed were also located near Chipotle branches. Reviews on Yelp were middling, with most locations rating just 3 or 3.5 stars, and many patrons seem to see it as a poor knockoff of Chipotle. 

Ruby Tuesday explained the closings by saying that some of the locations were outside its site selection criteria. While that may be true, it's unlikely that the chain would have closed them down if they were profitable. The parent company closed other Lime locations in its most recent quarter, and is in the process of shutting down some of its own underperforming namesake locations. It's also taken goodwill impairment charges on the acquisition, indicating it believes it overpaid for Lime. As a company in the midst of its turnaround attempt and consolidation plan, Ruby Tuesday does not seem ready to turn Lime into the growth juggernaut it was once supposed to be anytime soon.

Foolish bottom line
There have been other pretenders as well, including Qdoba, which closed 67 locations last year. This pattern offers a lesson for short-sellers like Einhorn and Gundlach: Chipotle's concept is not easily duplicated. While selling burritos may not seem like rocket science, Chipotle's combination of classic cooking methods and a unique culture and brand have made it a favorite of consumers and investors. With over 1,500 locations, it has become the nation's preeminent burrito chain, and that position won't easily be taken away. There may be more potential threats like Lime in the future, but don't let the shorts fool you. Chipotle's loyal customer base is not about to fall for cheap imitations. 

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Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. 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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