On Tuesday, Chipotle Mexican Grill (NYSE:CMG) announced that it will no longer pursue its burgeoning Asian restaurant concept, ShopHouse. The news almost certainly contributed to the 2.4% decline in Chipotle's share price in after-hours trading following the release of its third-quarter earnings.
Investors and analysts had long touted the possibility that ShopHouse would transform into a major growth driver for Chipotle. Designed in a similar manner to one of its burrito locations, the belief was that Chipotle's secret sauce was based, at least in part, on the way it served food. We now know that just isn't enough to propel another restaurant concept forward.
I, for one, really liked ShopHouse. Based on an interpretation of Thai cuisine, the first location opened in Washington, D.C., in 2011. Fast forward to today, and there are 15 ShopHouse locations in two distinct markets outside of the nation's capital -- Los Angeles and Chicago.
"We're proud of the ShopHouse team and the delicious food they've created and the excellent customer service they've delivered," said Chipotle's co-CEO Monty Moran on the third-quarter conference call with analysts. "But even though the food was delicious, the chain failed to attract the same level of customer loyalty and repeat visits that Chipotle did."
As a result of its decision to back away from the concept, Chipotle fully impaired the assets related to ShopHouse, writing off $14.5 million on a pre-tax basis in the three months ended Sept. 30. The chain will now seek "strategic alternatives" to dispose of the 15-unit Asian concept.
It's impossible to say exactly what Moran means by this, be it to close the chain altogether, to spin it off into a separate company, or to try to sell it. But his downbeat comments about its failure to develop into a "compelling growth strategy" certainly leads one to believe that there isn't much value there.
Moran was clear to point out that Chipotle's management teams remains optimistic about its other concepts, based respectively on pizza and burgers.
"We continue to believe that our approach to food, people, and unit economics, with the right cuisine, with the right concept, can lead to a compelling growth strategy," he said. "And we are optimistic that our other growth seeds, serving pizza and soon burgers, both of which have broad customer appeal, can become further growth strategies for us."
If you read between the lines, Chipotle's executives thus seem to believe that there isn't as broad of an appeal for Asian quick-service chains in terms of the frequency of customer visits as there is for burritos, pizzas, and burgers. This is disappointing, but the value in Chipotle was always in its eponymous burrito chain, which is still expanding at roughly 200 restaurants a year.
Ultimately, there's nothing wrong with failure. If Chipotle's executives weren't willing to take risks, its restaurants wouldn't be here in the first place. This is a minor bump in the road for an otherwise solid company that will continue to reward shareholders like me for years to come.