The fast casual food chain Chipotle (CMG 1.07%) has become a big name in the U.S. restaurant market. Highly regarded for its focus on "Food with Integrity," the company is witnessing incredible growth compared with other restaurants. In the last five years, the chain has more than doubled its revenue and grown its net income by two and half times. Chipotle's huge success has fueled its ambition for adding more stores and expanding its reach. Within a span of two decades the chain has mushroomed to include more than 1,500 stores. Let's dig deeper to figure out the reason behind the burrito and taco specialist's excellent operational performance and its investment strategies that are helping to keep the growth momentum strong.
Source: The Motley Fool
Secrets to success
Despite no reliance on franchises, Chipotle's growth curve has been phenomenal. Steve Ells, founder of Chipotle, opened the first Chipotle restaurant in 1993 hailing it as a fast casual outlet that gives an upscale dining atmosphere with quality food for higher prices. What sets Chipotle apart from other restaurant chains is its solid restaurant level operating margin that has consistently stayed north of 20% in the last five years.
Chart by author, Source: Chipotle, Nasdaq
Chipotle's performance is supported by its dedication toward "Food with Integrity." The use of naturally raised ingredients, dairy products, and its customizable menu have made it an extremely popular eatery. Restaurant goers love the fresh fare so much that they are willing to pay a premium, giving Chipotle pricing power in an industry dominated by value menus. Even a 6.5% hike in average prices per menu in the second quarter of 2014 did not dent its popularity. On the contrary, its foot traffic continued to increase. Second quarter same store sales growth was a remarkable 17.3%. And the best part is that only 2.5 percentage points came from the price increase, while the remainder came out of increased transactions.
The company also owes a lot of its success to its assembly line business model which allows it to serve as many as 65,000 possible freshly made combinations to customers at record speed. Together with the enhanced customer experience, this allows Chipotle to serve more customers, and in turn increase its sales and profits. According to an industry publication, some of Chipotle's stores handle more than 350 transactions per hour during lunchtime, while the national average, as per the company's co-CEO Monty Moran, is between 110 and 120.
Investment strategies to cement growth
The robust operating margin allows Chipotle to generate high returns on its assets and its overall investments. And the company creates long-term value for its shareholders by making continued investments in store unit growth -- but management's been extremely particular about selecting the restaurant location.
Chart by author, Source: Morningstar
Identifying the right location is a must for success, and Chipotle is fully cognizant of this fact. More often than not, restaurants set up in high streets or areas of special interest are seen to perform very well. Chipotle refers to these places as "proven markets", and has said that it will open 70% of its new restaurants here, while the remaining shall be equally split between "developing or established markets" and "new markets." In the second quarter of 2014, Chipotle's new restaurant opening sales volume stood between $1.6 million and $1.7 million, which the company expects to increase to $1.7 million and $1.8 million.
Chipotle manages its expansion program very tightly. While other restaurateurs heavily depend on franchising for expansion, the company does not go for franchising at all -- first, because it's easier to retain control on offerings and maintain the "food culture" in owned restaurants. Second, with more than a billion dollars in cash, the company is self-sufficient to fund its expansion instead of raising money through franchising fees.
Capital expenditures and new stores
In the last five years, Chipotle has grown its store count by 13%-15% every year, thereby adding more than 600 new stores. More than 98% of its outlets are located in the U.S., with a few in Canada, England, France, and Germany. The restaurant chain targets to open 180 to 195 new stores in fiscal year 2014 ending December 31, including a few ShopHouse and Pizzeria Locale restaurants. In the first six months, it has opened 89 new restaurants, raising the total store count to 1,681.
Source: Chipotle 10Ks for respective years
For 2014, Chipotle has a capex budget of $235 million. It plans to spend three-fourths of this on opening new stores and the remaining amount is planned to be reinvested in restaurants. In fiscal year 2013, Chipotle's average spending in the development and construction of a new restaurant stood at around $800,000 in the U.S. and $830,000 in international locations.
Chart by author, Data source: Morningstar
Foolish thoughts
Chipotle's expansion plans look very sturdy. Also, the fact that customers continue to visit Chipotle restaurants despite higher prices indicates that Americans are choosing quality over price. With remarkable restaurant level operating margins, continuous growth in top and bottom lines, and aggressive store expansion, the fast casual food chain is poised to scale greater heights.
