There I was listening to the conference call of Chipotle Mexican Grill (NYSE:CMG) as its management talked about the restaurant's pricing power, and it got me thinking. "Somebody else is going to copy this with an enhanced version and give Chipotle Mexican Grill a run for its money someday." I didn't think "someday" would come so soon. The vastly experienced and successful Taco Bell people of Yum! Brands (NYSE:YUM) have an idea with teeth that could be heading for Chipotle Mexican Grill's jugular.
Who can blame them
Chipotle Mexican Grill's sales growth, margins, and profitability are the envy of restaurants everywhere. While most others complained about snow and winter storms when they reported their results last quarter, Chipotle Mexican Grill reported results as if it were the only game in town.
Last quarter, Chipotle Mexican Grill's revenue jumped 24.4%, same-store sales leaped 13.4%, and net income popped 8.5%. Things are going so well that the company believes it has pricing power and it is raising prices accordingly, as if its growth wasn't already robust enough.
Chipotle Mexican Grill is barely 20 years old with 1,600 locations and it already has nearly half the market cap of Yum! Brands. Yum! Brands has 40,000 restaurants under its belt. That puts the market cap contribution of each Chipotle Mexican Grill restaurant at over ten times that of a Yum! Brands restaurant.
The taco twist
Yum! Brands is testing the possible roll-out of a fast-casual Mexican food chain that seems to want to be Chipotle Mexican Grill on steroids (pun intended) called U.S. Taco Co. It plans to serve open-faced soft shell tacos with all kinds of fancy-sounding ingredients such as Texas brisket and Maine lobster. According to Foodbeast.com, "One of the US Taco Co.'s featured tacos is the Winner Winner, a crispy chicken taco made with South of the Border Southern Gravy, roasted corn Pico de Gallo, fresh jalapenos and cilantro."
Believe it or not, most of these "tacos" won't technically qualify as Mexican food. Yum! Brands will base each of the tacos on the menu on an American meal such as a Philly cheesesteak. Don't expect to see beans, burritos, or tortilla chips. Yum! Brands is coming after Chipotle Mexican Grill's business, only with something totally different and perhaps more fun. This hip restaurant will have rock music, glass walls for visibility into the kitchen, an outdoor patio, and spiked milkshakes. It even uses a skull as part of the logo. Maybe leave the kids and grand-parents at home for this one.
This could take off
If U.S. Taco Co. proves to be a hit, Yum! Brands is going to go for it big. Greg Creed, Taco Bell's chief executive, stated, "I would love to one day see 1,000 of these." How fitting next to Chipotle Mexican Grill's 1,600 store count. With its 40,000 Taco Bells, Pizza Huts, and KFCs, Yum! Brands knows how to expand & operate efficiently, how to do great marketing, and how to do great advertising. A large-scale roll-out could happen sooner than you think and sooner than Chipotle Mexican Grill would like.
Creed mentioned that Yum! Brands did some "consumer-segmentation research" and found "a number of segments that provide growth for Taco Bell" based on "higher-quality ingredients and better atmosphere." Research, huh? Just pop open any one of Chipotle Mexican Grill's earnings reports lately. Same conclusion.
As quoted in adage.com, he reminded everybody that Yum! Brands "has the talent and the money. Watch out, Chipotle Mexican Grill. You may be faced with a new kid on the block who looks devilishly familiar.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool 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.