How McDonald's and Wendy's Are Copying Chipotle's Playbook

Chipotle Mexican Grill (NYSE: CMG  ) has been a consistent performer over the last year. Its bottom line surged 19.7% in fiscal 2013, supported by a top-line growth of 17.7%. It looks like the momentum is continuing into the new fiscal year as evidenced by Chipotle's recent results. This is remarkable considering that the restaurant industry has been struggling with same-store traffic in the negative territory since March 2012 .

However, peers like McDonald's (NYSE: MCD  ) and Wendy's (NASDAQ: WEN  ) are looking to emulate the success of Chipotle to drive guest traffic and fuel organic growth. Let's take a look at Chipotle's performance and see what its peers are up to.

The robust performance continues
During the first quarter of fiscal 2014, Chipotle's revenue surged a whopping 24.4% versus the prior-year quarter. Top line growth was fueled by 13.4% year-over-year growth in same-store sales, or comps, complemented by the opening of 44 new restaurants. The robust comps indicate that Chipotle's moves are resonating well with its customers.

Chipotle is focusing on three areas to drive growth -- a unique food culture, a unique people culture, and a strong economic model that differentiates it from peers. The company is making significant progress in each of these critical areas.

Focused on growth
Chipotle continues to strengthen its food culture through the use of ingredients from more sustainable sources and preparing the food using classic cooking techniques. One of Chipotle's key initiatives is the elimination of genetically modified organisms, or GMO, ingredients from food, and the addition of Sofritas -- the all new vegan menu item -- to 40% of restaurants . Encouraged by the item's success, the company will continue rolling out Sofritas to other locations going forward.

Also, Chipotle will continue to shift ingredient sourcing to non-GMO options. In its North America locations, all oil used for cooking is non-GMO, and after a few key steps, all food would be non-GMO ingredient based. Its marketing campaign -- Scarecrow, as well as Farmed and Dangerous -- is also focused on issues of GMO and overuse of antibiotics in livestock farming for creating consumer awareness. As awareness regarding the harmful effects of GMO-based food spreads, more customers should come into Chipotle's fold.

Peers playing copycat
The success of Chipotle's business model has encouraged others in the industry to follow its footsteps.

Wendy's, for example, came out of the red last year on the back of the successful launch of its Pretzel Burger . Taking a cue from Chipotle's playbook, Wendy's is positioning itself to be a leader in the fast-food wars. It is offering upscale items on its menu, including Cashew Chicken Salad, Ciabatta Bacon Cheeseburger, BBQ Ranch Chicken Salad, and Premium Cod Fillet Sandwich. This is a part of its "Recipe to Win" initiative and is clearly inspired from Chipotle's food culture.

Moreover, Wendy's restaurant remodeling initiative is inspired by Chipotle. It plans to remodel half of its 600 company-owned restaurants by the end of 2015. The new restaurants will have minimalistic look tables, flat-screen televisions, Wi-Fi, fireplaces, lounge seating, and digital menus. These changes are again inspired from Chipotle. It is also rolling out a mobile payment system as a part of its Image Activation initiative for attracting tech-savvy customers.

Wendy's is even trying to emulate the "people culture" of Chipotle by hiring better employees as a part of creating a "whole new brand" consistent with its Image Activation initiative. These initiatives have helped Wendy's outperform McDonald's on the Street convincingly as seen below.

WEN Chart

WEN data by YCharts

McDonald's isn't far behind in emulating Chipotle's success in order to reverse its declining sales. It is testing the option where customers customize their burgers using a tablet . The test is being carried out in several Southern California locations, and further expansion is planned going forward.

McDonald's is also renovating its kitchen, and by the middle of the year it plans to equip all units in the U.S. with new high density kitchen preparation tables. This will allow for faster preparation and help add new toppings for sandwiches in the future. As consumers become conscious about non-GMO and sustainable sources of ingredients, McDonald's can be expected to offer more fresh fruits and vegetables, as well as sustainable fish and cage-free eggs in order to drive traffic going forward. This, again, is a move that will be Chipotle-inspired.

The takeaway
Chipotle's various initiatives have helped it record terrific growth in revenue and earnings as seen in the previous quarter. As such, it isn't surprising that both Wendy's and McDonald's are following its moves in order to boost their own businesses. This could lead to more competition for Chipotle going forward. However, the company's brand equity and the experience that it offers to customers should help it sustain its terrific performance.

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