Is Chipotle Mexican Grill (NYSE:CMG) the McDonald's (NYSE:MCD) of burritos? Not yet -- but the "original gangster of fast-casual food" may be well on its way to achieving the ubiquity and renown of Mickey D's. Depending on if and how fast this phenomenon occurs, Chipotle investors are either sitting on a barbacoa cash cow or are already suffering from decreasing returns to steak.
Chipotle's rich father
McDonald's was actually an early investor in Chipotle and cashed out big time when the burrito giant held its tasty 2006 IPO. Mickey D's must have seen glimpses of itself in the up-and-coming Chipotle restaurant chain -- perhaps similar assembly line efficiency and branding excellence that brought McDonald's untold scale and profits for almost 75 years.
These days, McDonald's doesn't seem so spry. Profits seem unlikely to grow much fatter -- owning 34,000 restaurants worldwide has that effect -- and once-loyal customers are beginning to question whether McDonald's is feeding them well or just cheaply. Indeed, McDonald's stock seems stuck in a rut, with a one-year change of approximately -0.1%.
McDonald's hipster son
Enter Chipotle, McDonald's hip offspring. Far from a chip off the old block, Chipotle dresses its 1,500 restaurants in trendy red paints and sheet-metal walls that blare upbeat songs. The burrito chain's focus on offering fresh, filling, healthy menu items for $7-$10 seems to be paying off: Chipotle's fourth-quarter same-store sales rose 9.3% (McDonald's' equivalent sales fell 1.4%).
McDonald's can't compete with Chipotle on menu health: salads comprise a wilted 2%-3% of the Golden Arches' revenue, while most every Chipotle item has fresh lettuce or veggies. If the market seeks health, and customers are willing to pay a $2-$4 premium over fast food for a higher-quality lunch, McDonald's global empire becomes at risk of crumbling slow like ancient Rome.
If Chipotle continues to grow and resemble McDonald's in scale, will it suffer the same fate?
Fast casual vs. fast food
Right now, Chipotle's riding a profitable fast-casual tsunami: customer traffic at fast-casual joints, an industry that Chipotle leads, rose a delicious 8% in 2013 (while fast food fell flat). Of course one day the fast-casual sector will also mature and decline, but Chipotle's taking future profits by the bullish horns by treading into innovative genres like Asian food and pizza.
Chipotle's Shophouse Southeast Asian Kitchen now sports six locations (in California, Washington, D.C., and Maryland) and could offer vibrant growth as Chipotle matures. Also on the horizon is potential growth brought about by Chipotle's December acquisition of Pizzeria Locale.
If Chipotle succeeds McDonald's as America's Don of Restaurants, its success will depend on finding, not fighting, inevitable market-altering trends and incorporating these into profit.