With about 3,200 locations, Chipotle Mexican Grill (CMG 0.48%) is one of the largest restaurant companies in the world and may be the world's largest purveyor of burritos. But it's about to branch out. On Feb. 15, Chipotle announced it's launching a new restaurant chain called Farmesa Fresh Eatery, specializing in customizable bowls of greens, grains, vegetables, and proteins.
This news may evoke mixed emotions from long-term Chipotle shareholders who might remember that Chipotle has experimented with developing new restaurant chains in the past but failed, robbing the company of time, focus, and resources. However, there's good reason to look past earlier failures and embrace Chipotle's latest experiment. Let's see why.
A walk down memory lane
At the end of 2011, Chipotle had just 1,230 locations. But during that year, it opened its first ShopHouse Southeast Asian Kitchen location, a concept developed entirely in-house. Then in 2013, Chipotle invested in a start-up pizza company called Pizzeria Locale. And in 2016, it opened a burger restaurant called Tasty Made.
ShopHouse would ultimately be Chipotle's most successful venture, growing to 15 locations. But five years after starting the experiment, management shut ShopHouse down because it wasn't delivering the desired financial profile.
For its part, the single Tasty Made location shut down in 2018 for the same reason as ShopHouse. And while Pizzeria Locale is still around, it hasn't led to an explosive growth opportunity. There are only five Pizzeria Locale locations for Chipotle -- there were seven way back in 2018.
For shareholders, this is undoubtedly frustrating. After all, Chipotle Mexican Grill locations have some of the most coveted financials in the entire restaurant industry. As of the fourth quarter of 2022, the average Chipotle restaurant location does over $2.8 million in average annual sales -- quite high. And this high volume allows it to command some of the best restaurant-level profit margins in the industry at 24%.
With financials like this, it's no wonder Chipotle chooses to own and operate all its locations instead of franchising -- it's the best move for creating shareholder value. But it would be even more compelling of an investment opportunity if the company could take its expertise from the Chipotle brand and build a portfolio of brands. Unfortunately, that hasn't happened yet.
Why Farmesa may be different
Rather than taking the slow, methodical approach with company-owned brick-and-mortar locations, Chipotle is forging an entirely different path with Farmesa. The company says it's partnering with a virtual kitchen company -- also known as a ghost kitchen -- named Kitchen United Mix.
Rather than building out a location for in-restaurant dining, ghost kitchens digitize the ordering process and are delivery only. This cuts operating expenses because ghost kitchens operate in small, out-of-the-way locations and need fewer workers. Third-party delivery handles orders. And Chipotle needs to focus only on menu development -- Kitchen United Mix handles the kitchen operations.
The other advantage of the ghost-kitchen model is that Chipotle can open quickly in many markets without investing in real estate. This experimentation phase allows management to make quicker decisions at scale with minimal investment.
Chipotle's Vice President of New Ventures, Nate Lawton, said in the press release, "Launching Farmesa in the Kitchen United Mix food hall in Santa Monica and partnering with third-party partners for pickup or delivery will allow us to reach a large number of consumers, learn quickly, and evolve our concept and menu so that we can deliver on our goals before expanding."
Chipotle should be able to determine the viability of the Farmesa concept quickly. And once it does, it can invest in growing the brand the Chipotle way, with company-owned locations.
I wouldn't necessarily go out and buy Chipotle stock today based solely on this news. But for those wondering about the company's long-term upside, perhaps Farmesa provides a new revenue opportunity they hadn't previously considered. And if the experiment succeeds, Farmesa could play a part in future market-beating returns.
One final takeaway: Chipotle also said that "Farmesa will help Chipotle test and learn on future restaurant concepts." In other words, whether Farmesa succeeds or flops like past experiments, partnering with Kitchen United Mix allows Chipotle's management to experiment quicker and more often, increasing the odds that it could eventually find a second restaurant concept to grow with long term.