Can Chipotle Mexican Grill Really Become a $10 Billion Business?

Its new CEO asserted that the restaurant chain could double its revenue again -- though he didn't say how long that might take.

Rich Duprey
Rich Duprey
Jul 18, 2018 at 9:50PM
Consumer Goods

Chipotle Mexican Grill's (NYSE:CMG) new CEO Brian Niccol has some grand plans. In announcing his turnaround plan for the fast-casual restaurant chain last month, he said he "can easily see a future where Chipotle more than doubles the business to $10 billion in revenue."

Yet in the conference call that followed, executives failed to flesh out the details of how they planned to achieve their ambitious goals. And Niccol offered no timetable for when he expected Chipotle to be able to more than double its revenue.

Having goals is good, but you generally only reach them if you have a roadmap to follow.

View of Chipotle Mexican Grill restaurant from the serving station

Image source: Chipotle Mexican Grill.

Analysts chastised the company for its lack of specificity. Guggenheim's Matthew DiFrisco, for example, wrote in a note to clients that the call "lacked meaningful near-term catalysts or fine tuned financial objectives."

The former Taco Bell executive is most known for his success in turning that chain into a social media brand via effective marketing to younger consumers, and it's likely that he'll replicate much of that strategy at Chipotle.

A new plan of attack

Chipotle Mexican Grill is still trying to recover from the 2015-2016 E. coli contamination scandal that drove customers away and sent revenue tumbling by 13% in 2016. Although sales rebounded somewhat in 2017, a lot of work remains to be done.

In a press release that broadly described the changes he wants to make in its corporate culture, Niccol said that Chipotle will:

  • Become more culturally relevant and engaging;
  • Digitize and modernize its restaurants;
  • Improve hospitality;
  • Enhance its "powerful economic model" by being disciplined and focused; and
  • Build a support structure for the innovation to come across the company.

By doing these things, Niccol hopes to put Chipotle back on its former growth trajectory. Yet that might not be feasible: at least not in a reasonable amount of time.

CMG Revenue (TTM) Chart

Chipotle Mexican Grill Revenue (TTM), data by YCharts. TTM=trailing twelve months.

No longer a growth stock

Chipotle Mexican Grill has a history of strong growth, having doubled its revenue every few years before the foodborne-illness crisis hit the chain. But it was also a much smaller, more nimble company that was leading the crest of a fast-casual restaurant wave that has long since matured.

At the time, it was one of a relatively small number of national Tex-Mex chains. There has since been an explosion of them, including Moe's Southwest Grill, Baja Fresh, and Qdoba, which itself has been struggling.

But increasing competition isn't the only reason why it may be many years before Chipotle's annual revenue hits $10 billion.

When Chipotle doubled revenue between 2007 and 2011, the number of restaurants it operated grew from 704 to 1,230: a 75% increase. When revenue doubled again by 2015, the chain had grown by another 63% to 2,010 locations.

Today, Chipotle has more than 2,400 restaurants -- a 21% increase from two years ago -- but the company is now intent on closing underperforming stores. That's a smart strategy, but one that will slow its expansion rate.

More pain on the menu

Between the store closures, the moves to restructure the business, and the relocation of its corporate headquarters from Denver to Newport Beach, California, Chipotle expects to take as much as $135 million in charges over the next few quarters.

While store openings fueled a lot of the chain's early growth, repeat business is vital, too, and Chipotle is still having trouble attracting customers. Although it has reported comparable restaurant sales growth in recent quarters, the increases were driven by higher average checks, not more traffic. 

It's not certain that what worked for Niccol at Taco Bell -- a fast-food purveyor that tends to take an irreverent tone about its menu -- will work at a chain whose customers are noted for their seriousness about conscious eating and healthfulness. "Yo quiero Chipotle Mexican Grill" from a talking chihuahua might not generate the same resonance.

With the fast-casual trend waning, restaurant dining habits changing, and direct competition rising, its unreasonable to expect revenue to double at Chipotle any time soon. It's good that Niccol has a positive outlook for his company -- what else should a new CEO have? -- but investors shouldn't put much stock in such claims.

Currently, the restaurant chain's shares are trading at levels typically reserved for businesses on top of their game, not ones searching for a path out of the morass. Investors considering buying Chipotle stock might want to take a pass.