Why Chipotle Mexican Grill's South-of-the-Border Menu Needs to Move North

Canada represents a huge opportunity for the fast-casual leader.

Jul 1, 2014 at 6:30PM


The fast-casual dining concept is well established in the U.S. restaurant industry, being the only segment to be consistently seeing expansion in terms of revenues and units. Led by Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA), the quick-serve niche has become the go-to format that others want to emulate, with both fast-food chains and full-service restaurants adopting many of the hallmarks of the segment to bite off some of its halo effect.

Burger King Worldwide, for example, created a lounge-like atmosphere in its restaurants and limited the number of limited-time menu offerings to bring it somewhat closer to a fast-casual feel while Yum! Brands is testing out three new fast-casual concepts, which suggests it's having something of an identity crisis. But it's with good reason they're trying to dabble in the niche, since NPD Group says last year was the fifth straight year fast-casual dining has beaten overall industry growth, surging 8% in 2013 compared to restaurants as a whole being flat.

Yet there is the possibility that with saturation comes stagnation, and the segment's leaders may just want to look north of the border into Canada for the next market to conquer.

The market watchers at Technomic just released a survey showing that fast-casual dining is undergoing a massive uptake in the Great White North, with 22 fast-casual chains breaking into its list of the top 200 largest restaurants for the first time. Not surprisingly, Panera Bread is leading the way in growth, experiencing 85% sales growth last year as the number of units in the country widened 33%, but others like Five Guys, Thai Zone,Thai Express, and Hero Certified Burgers were also big movers, boasting sales growth of 30% or more.

For all of Panera's industry-leading qualities, though, it only had 12 bakery-cafes in all of Canada as of Dec. 31, including seven company-owned restaurants and five franchised units. In comparison, Chipotle had seven restaurants in Canada (up from five the year before), but importantly it has another chain that could do even better.

As the Technomic survey points out, Asian and burger chains were the fastest-growing concepts in Canada, with sales up 7% and 6%, respectively ("all other" -- which includes doughnuts and healthy foods as well as the beverage, ethnic, poutine, and snack categories -- grew 10%). Of those 22 fast-casual chains breaking into the top echelon of restaurants, half of them were Asian and burger joints.


Source: ShopHouse Southeast Asian Kitchen.

Chipotle is conveniently developing the ShopHouse Southeast Asian Kitchen, a chain of Asian-inspired restaurants that, although just a small component of its portfolio of 1,600 stores, could be expanded up north to take advantage of the trend there. Its main dishes consist of rice or noodle bowls made with steak, chicken, pork and chicken meatballs, or tofu. Although to a customer the cuisine of a Chipotle and that of a ShopHouse are completely different, to the company they're really the same in how it's approaching the concept. Once again, Chipotle is looking to change the way people view fast food, and ShopHouse can do for typical Chinese takeout what it did for typical Mexican fast food.

Although fast-casual dining is catching on in Canada, it does have a ways to go yet. Whereas 40% of U.S. customers patronize a fast-casual establishment at least once a week, only 25% of Canadians do so. They're more likely to go to a fast-food restaurant, as 58% polled said they visit them with such frequency, considerably narrowing the gap between U.S. diners, 64% of whom say they eat at the chains regularly.

Even so, Technomic says that Asian, Mexican, and burger joints are in the sweet spot of growth up north, and that bodes well for Chipotle, regardless of whether it pushes its namesake chain, as is more likely, or brings ShopHouse Southeast Asian Kitchen with it. A two-pronged approach may be best, but either way, Chipotle seems well positioned to capitalize on fast causal's growth in Canada.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill and Panera Bread. It recommends Burger King Worldwide. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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