Chipotle Mexican Grill Caters to Customers' Needs

Leading fast-casual chain takes the lead in new growth opportunity to stand out from the crowd.

Jun 25, 2014 at 5:47PM

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Source: Chipotle Mexican Grill.

Restaurants are realizing it may be profitable to go to the customer instead of only having the customer come to them. Just as Chipotle Mexican Grill (NYSE:CMG) helped restaurants everywhere wake up to the possibilities offered by the fast-casual dining segment, it also blazed the path the wannabes are following to now differentiate themselves in what has become a diluted marketplace. Off-premises catering looks to be the next "thing" in dining.

After years of profitable growth as the leading fast-casual chain, where customizable, quality ingredients are served in an relaxing environment and at a reasonable cost, Chipotle last year began experimenting with the concept of bringing its Mexican fare into customers' living rooms, backyards, offices, and event spaces via individualized catering menus for groups of 20 to 200.

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Source: Chipotle Mexican Grill SEC filings.

Fast casual is one of the few areas of the restaurant industry that has seen consistent growth. The market watchers at NPD Group said the fast-casual niche enjoyed its fifth straight year of industry-leading growth in 2013, enjoying 8% expansion compared to flat growth for restaurants as a whole. But as everyone tries to bite off some of the sector's halo effect, the impact becomes diluted.

The increasingly crowded field comes not just from start-ups such as Mediterranean cuisine specialist Zoe's Kitchen (NYSE:ZOES), which went public in April. Fast-food burger shop Wendy's began installing lounges in its restaurants in 2012 to give it that fast-casual ambience, while at the same time Yum! Brands brought in a celebrity chefs to spice up its menu. It also began testing two new fast-casual concepts in recent months. The corner pizzeria is the latest entrant, with a profusion of pie joints coming to the market, including PizzaRev, Blaze Pizza, and Pie Five. In fact, Chipotle got so tired of pizza joints claiming to be "the next Chipotle of pizza" that it partnered with Pizzeria Locale to operate its own fast-casual pizza parlor.

But it's hard to stand out from a crowd when everyone is proclaiming the same thing, so last year Chipotle began offering a new catering program that will bring its customizable menu to large groups. During its last conference call, Chipotle reported that the program was fast approaching 1% of total company revenues; more important, it was pushing up the average check -- which is to be expected, with the average catering order costing about $300. With June being the time for graduation parties, the Mexican restaurant is promoting a "Graduatering" catering deal through the end of the month that offers four free burritos when you set up a catering order for 30 people or more.

Other companies are clearly keeping an eye on that revenue growth, because now it seems everyone else is also beginning to offer catering. Moe's Southwest Grill, McAlister's Deli, and Schlotsky's sandwich shop, all concepts owned by private equity firm Roark Capital Group (which also owns Auntie Anne's, Carvel, and Cinnabon, as part of its Focus Brands division), recently began offering catering services, while PizzaRev started offering catering at 10 shops in Los Angeles as it figures out a way to develop a blueprint for franchisees.

Zoe's Kitchen has long had catering as an integral part of its business, and it represented 17% of company revenue in 2013. Although it enjoyed strong growth during its period as a privately held company, Zoe's may be feeling the effects of fast-casual fatigue. While revenue continues to climb as it adds new restaurants, the rate of growth in same-store sales, an important retail metric because it measures organic growth rather than growth achieved through adding more restaurants, is flagging. 

After three consecutive years of double-digit comps growth, growth was cut in half last year to 6.9% and was lower still in Zoe's first fiscal quarter at 5.7%. It anticipates full-year comps expansion somewhere between just 4% and 6%.

In short, we seem to have a case once again of Chipotle Mexican Grill doing something, if not first, at least better than the competition, and leaving its rivals scrambling to catch up. After dipping to a low of $472 per share in late April, the stock has rallied 26% and now sits just below its record high. There's no reason to believe it won't continue catering to investor desire for greater growth.

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Rich Duprey has no position in any stocks mentioned. 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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