Is Zoe’s Kitchen the Next Chipotle Mexican Grill?

The market for Zoe's Kitchen may be smaller than you think.

Jul 18, 2014 at 12:00PM

Source:  Zoe's Kitchen

We all want to find the next Chipotle Mexican Grill (NYSE:CMG) while it is still in its infancy. Fast-casual Mediterranean cuisine chain Zoe's Kitchen (NYSE:ZOES) could very well be the next one in terms of stock price returns, who knows; but despite both restaurants being in the fast-casual segment, the odds are long that Zoe's will grow as large or larger. The reason why is simply due to different target markets.

The wholesome results
Zoe's Kitchen reported fiscal first-quarter results on June 5. Revenue rocketed 47.4% to $46.3 million. Same-store sales jumped 5.7%. Adjusted earnings before tax, depreciation, and amortization leaped 42.5% to $3.8 million.

Zoe's Kitchen opened 22 restaurants (including franchises) for an increase of 22% in just this quarter alone. Kevin Miles, CEO of Zoe's Kitchen, stated that the company was excited by the results. He added, "We're looking forward to building on this momentum and remain focused on delivering long term shareholder value."

The percentage growth was nothing short of fantastic. Zoe's Kitchen expects between 4% and 6% same-store sales growth for the remainder of the year. This is in line with what Chipotle Mexican Grill posted for 2013. It all sounds great for the tiny chain, but what about the long-term potential?

I'll have it on the side
Zoe's Kitchen claims that its target market is "educated and affluent women," and its average customer is part of a household with more than $100,000 in annual income. In stark contrast, Chipotle Mexican Grill's target market is millennials -- the starving college students. As USA Today puts it about millennials, they are "the heart of Chipotle's target customer."

While both Zoe's Kitchen and Chipotle Mexican Grill no doubt attract customers of all walks of life including age and income, there is no getting around who their bread and butter is in terms of sales. And each of those has different size markets.


Source: Zoe's Kitchen

Consider this
Only about 20% of American households are said to make more than $100,000 per year. With a population of around 318 million, that is a target of around 64 million people. Figure around half of them being women, and you're down to 32 million.

Only 51% of wealthier Americans are likely to eat out once a week at fast-food or fast-casual places; and even ignoring the fact that women are less likely to eat out statistically in general, Zoe's Kitchen's admittedly still huge target market dwindles down to 16.1 million.

Now turn to Chipotle Mexican Grill's millennial market. They are 27% of the US population, or around 86 million people. Sixty percent of them eat fast food at least once a week.

Do the math real quick: Around 51.6 million millennials eat fast food once a week compared to 32.6 million wealthy people. Chipotle Mexican Grill, unlike Zoe's Kitchen, is targeting both genders. So now you may be talking 51.6 million once-a-week millennials who eat out versus 16.3 million wealthy women as their respective target markets.

Foolish takeaway
Although there is still a huge potential market out there for Zoe's Kitchen in areas of concentrated wealth, the market it is targeting is roughly one-third that of Chipotle Mexican Grill. The good news is that it is still an enormous market for this little 100-something chain compared to Chipotle's more than 1,600 units.

The better news is, who knows, Zoe's Kitchen may over time attract a more loyal fan base among its smaller market than Chipotle sees among its larger market. But I wouldn't bet on it. Zoe's does not appear to be the next Chipotle Mexican Grill in terms of potential, and I didn't even touch on Americans' stronger acceptance for Mexican food in general compared to Mediterranean food.

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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.

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