1 Thing That Worries Me About Chipotle Mexican Grill

There's no doubt that Chipotle Mexican Grill (NYSE: CMG  ) is one of the biggest success stories in the restaurant industry over the past two decades. At the same time, however, there's one reason to wonder whether it can live up to its true potential. That reason is China.

Tapping into the Chinese consumer has become the highest priority for any restaurant company with global ambitions. McDonald's (NYSE: MCD  ) is opening nearly a restaurant a day in the East Asian country. And Yum! Brands (NYSE: YUM  ) -- the proprietor of the KFC, Pizza Hut, and Taco Bell brands -- now generates more income in China than it does in the United States.

To only slightly overstate the case, China is both the Holy Grail and the fountain of youth all rolled into one for consumer-focused brands. With a population four times that of America's, a growing middle class, and government policies aimed at fueling domestic consumption, the sky is literally the limit for companies like Chipotle, McDonald's, and Yum! Brands.

However, despite Chipotle's success in the United States and fledgling operations in Europe, it remains to be seen whether its burrito-themed concept will resonate with Chinese consumers. It's worth noting, for instance, that Yum! Brands has had tremendous success with its KFC brand in China yet has gained absolutely no traction with Taco Bell.

The potential obstacles for Chipotle seem to be twofold. First, it's far from certain that the Chinese consumer will embrace Mexican cuisine enough to support an operation encompassing thousands of locations. According to former-China-based blogger Andy Madison, "among southern Chinese, who have long favored rice over bread, wrap-like items are not big sellers."

And second, Chipotle's fast-casual service model may not resonate in China to the same extent it has here. "Asian family dining is sharing communally; you have lots of people there," says James Fallows of The Atlantic. This calls into question both the burrito construct itself and the assembly line format pioneered by Chipotle.

As Madison noted in the same blog post:

Chipotle's appeal stateside rests largely in its simplicity. You order a burrito, you order a soda. They could sell other, higher markup items such as cookies, but they choose not to tamper with success. Chinese tend, when dining out, particularly when they're eating at a fancy place -- as Chipotle undoubtedly would be -- to order several items to be shared among the diners. Burritos are not at all conducive to sharing and naked tortilla chips would do little to make up for the shortfall.

Just to be clear, this isn't merely an academic debate for investors. Chipotle's stock trades for 48 times earnings. That's more than two and a half times the premium accorded McDonald's. To equalize this, Chipotle will at the very least have to double in unit count, while continuing to increase same-store sales at an impressive click.

Can it do the former without China? That remains to be seen, but it's a question that should be at the forefront of every Chipotle shareholder's mind.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2014, at 1:20 PM, gistanleyjr wrote:

    Surely, you have heard about Chipotle's Asian-Themed restaurant - ShopHouse. Try Motley Fool article 4/20/14. And Pizzeria Locale. They will make YUM and MCD look like chumps in China. You can bet UR chopsticks on that.

  • Report this Comment On April 26, 2014, at 1:33 PM, JohnMaxfield37 wrote:

    gistanleyir,

    I agree with you regarding ShopHouse; the difference being that its success, which I believe it to be probable, still remains to be seen relative to Chipotle itself. That being said, like you, I believe ShopHouse probably offers Chipotle its best shot at success in Asia.

    John

  • Report this Comment On April 27, 2014, at 10:38 AM, TMFGemHunter wrote:

    Hey John,

    To me, it seems like Asia is just a built-in option in Chipotle shares. Based on the long lines that are typical of Chipotle restaurants in the U.S., I think the company could double or triple its U.S. Chipotle restaurant count in the next 10 years or so without diluting margins. (To put it another way, finding real estate fast enough seems like a bigger constraint than demand.)

    Add on expansion in other Western developed countries and the ShopHouse/Pizzeria Locale concepts, and you have long-term potential for 10K-20K units -- maybe even more -- without relying on China.

    Adam

  • Report this Comment On April 27, 2014, at 12:56 PM, Alexa225 wrote:

    I completely agree with Adam and I think it's way too early for the China question to be at the forefront of every Chipotle investor's mind.

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