Most investors are familiar with Chipotle Mexican Grill (CMG 2.41%) and Starbucks (SBUX 0.47%) as both businesses are frequent consumer destinations. Tex-Mex chain Chipotle has seen its shares rise 53% through the first six months of 2023. Coffeehouse giant Starbucks, on the other hand, is trading at the same levels as where it started out the year.
Chipotle and Starbucks are two of the best restaurant companies out there. But which stock is the better buy right now? Let's find out.
The case for burritos
It's hard to find reasons not to like the fast-casual leader, Chipotle. The company's growth has been great. Between 2017 and 2022, revenue increased at a compound annual rate of 14%. And even during 2020, a year that was otherwise catastrophic for the restaurant sector, the company's sales jumped 7.1%.
In the most recent quarter (Q1 2023, ended March 1), revenue was up 17.2% year over year, with same-store sales rising 10.9%. Chipotle's gains are impressive given the uncertain macroeconomic backdrop. The store base is rapidly expanding, now at 3,224 total locations. But over the long term, executives believe there could be 7,000 stores in North America.
Inflationary pressures have hurt nearly all businesses in the past couple years, pushing up the costs for key inputs while hurting the spending power of consumers. Restaurants and other retail businesses should be struggling to keep up. But again, Chipotle has found a way to thrive. Its first-quarter operating margin of 15.5% was significantly higher than in the year-ago period.
Higher menu prices -- about 10% above a year ago -- helped expand margins. And this hasn't had a negative impact on consumer demand for Chipotle's popular burritos and bowls. In fact, CEO Brian Niccol said that "transaction trends were positive throughout the quarter and the strength has continued into April."
The coronavirus pandemic was a major stress test for Chipotle, and it passed with flying colors. I think one of the most important takeaways was the strength of the company's digital foundation. Chipotle launched its rewards program, now with 33 million members, in March of 2019. The pandemic accelerated customers' use of its mobile app for orders.
In the first quarter, 39% of food and beverage sales came from digital ordering. This is meaningful because these customers are generally more frequent spenders than non-rewards members. Moreover, these orders tend to generate higher margins.
The case for caffeine
Starbucks didn't perform as well as Chipotle during the pandemic since the coffeehouse chain relies on commuters traveling to and from the office for a lot of its business. And coming out of the health crisis, it has seen an uneven recovery, with the U.S. returning to same-store sales growth rather quickly.
China, Starbucks' biggest growth market, lagged behind because of extended lockdown measures. However, the country just posted 3% same-store sales growth in the fiscal 2023 second quarter (ended April 2). This recovery will be a nice tailwind for the overall business in the near term as there are currently 6,243 Starbucks locations in China, generating $764 million of revenue in the last quarter.
Starbucks also leans heavily on technology and digital tools to bolster its competitive positioning. The company launched its rewards program, what many consider the gold standard among corporations, in 2009. It now has 30.8 million 90-day active members. The mobile app allows these customers to order ahead of time and earn points that can be redeemed for free coffee or food.
Fifty-seven percent of sales at U.S. company-operated stores during Q2 came from loyalty members, so it is obviously a major revenue driver. Because coffee lends itself to significant repeat purchase behavior by customers, it's perhaps not too surprising that this program has been so popular. Starbucks is even experimenting with Web3 technology to further enhance its connection with consumers.
It's also very hard to ignore Starbucks' longevity and durability. The company opened its first store in 1971, and since then, it has become one of the most powerful and widely recognized brands in the world. The industry Starbucks operates in doesn't attract much technological disruption, and this means that it will likely be doing the same thing in 50 years that it's doing today. That makes this a "forever" type of investment.
It depends on what you prefer
Both of these top restaurant stocks have compelling investment merits, making it a difficult endeavor to pick a winner. Investors who care more about growth will likely prefer owning Chipotle even though its valuation looks expensive. And for those who care more about durability and a more reasonable valuation, but at the expense of outsized growth potential, Starbucks looks like the right choice.
