Chipotle Mexican Grill's (NYSE:CMG) 21-year track record can only be described as a runaway restaurant success story. But by now that's old news to investors. Along with diners, they're salivating over the next two entrees currently cooking in Chipotle's kitchen: the Asian-influenced chain, ShopHouse, and the Neapolitan pizza joint, Pizzeria Locale.
With regard to these budding concepts, Chipotle's co-CEOs Steven Ells and Monty Moran have generally played their cards close to the vest. But they recently spoke more openly about their ambitious plans for Chipotle's offspring. Here's a rundown of what investors need to understand about ShopHouse and Pizzeria Locale today.
Where did the ideas come from?
With ShopHouse, co-CEO and founder Ells had an inkling that he could create a spinoff concept that resembled Chipotle but with a different cuisine. Still, he needed a nudge to push Chipotle outside of the world of burritos. That’s where Chipotle's director of concept development, Tim Wildin, came in. Wildin was aware of Ells' love for Thai food, so he arranged for a culinary-inspired trip to Asia for Ells and a few others to taste some of the authentic ethnic cuisines. It was there that the idea of ShopHouse was born. According to Wildin, "None of this was driven by market research or customers. Nothing... It would be totally different and it probably wouldn't be successful. This was driven by a love of really good food." ShopHouse launched in Washington, D.C., in 2011.
For Pizzeria Locale, Ells crossed paths with two old friends and successful restaurant entrepreneurs, Lachlan Mackinnon-Patterson and Bobby Stuckey, who were looking to expand their Boulder, Colorado-based pizza joint. Ells suggested they take a page out of Chipotle's book and lower the prices while ditching the table service for an assembly-line counter. Then, he offered to invest in it to take it to the next level. The tag team kept their fast-casual pizza dreams a secret from 2012 to December 2013, when The Wall Street Journal broke the story.
What's on the menu?
ShopHouse serves Asian-inspired cuisine in bowls and Pizzeria Locale serves traditional personal pizzas. Both outlets allow customers to customize according to their tastes. As with the Mexican restaurants, it's all about fresh, responsibly sourced ingredients, time-honored cooking techniques, tons of prep work, and then incredibly speedy turnaround time in the restaurants.
Ells shed light on how they stand out from the pack at a recent conference:
At ShopHouse: "I would say the difference between ... typical fast food Asian that we think of in the United States and ShopHouse is extraordinary. The flavors here at ShopHouse are bold and bright, a lot of emphasis on vegetables, real meats, roasted meatballs, a beautiful braised tofu and then finish it off with our green papaya salad, or pickled vegetables, fresh herb topping."
At Pizzeria Locale:
It's a different approach starting with the dough, it's a long fermentation, a long rise, a 24 hour rise, and it's done right in sight of the customers, the first thing the customer sees, beautiful ingredients, we use the same Niman Ranch Pork, the same rBGH-free dairy, the food with integrity emphasis is there and customers are going to the service line in exactly the same way that they do at Chipotle.
The pizza takes two minutes to bake and when they finish assembling their pizza, it goes right into the oven, the customer then continues down the line and might get some prosciutto, sliced prosciutto on our cheese slicer, some meatballs, that can make a salad, there is a variety of different salads and wines and then by the time they are at the register, and finish paying, their pizza is ready. So it's a really new way to think about pizza and people are very, very excited about it.
How many stores have opened? Where are they?
ShopHouse: Six in Washington, D.C., and Los Angeles combined; the company plans to have 10 to 12 open in these cities by the end of 2014.
Pizzeria Locale: One in Denver; a second is under construction and a site location is being identified for the third.
How does that compare to Chipotle's overall store count?
Chipotle's total restaurant count stands at 1,637. So, ShopHouse and Pizzeria Locale make up a paltry 0.43% of stores currently.
How is the expansion process going?
The answer to this question depends on the yardstick you measure against. Chipotle has carried out a methodical, test-and-learn strategy at ShopHouse, for example, in Washington, D.C., which included a full two-year trial period starting in 2011. Only in the past year has Chipotle started to scale the concept to Los Angeles.
With that in mind, the rollout at ShopHouse has been slow and steady, but Chipotle believes the infrastructure is in place to gradually expedite that process now that it's finalizing the menu items.
There's no reason to question that logic. These concepts vary from its existing Mexican restaurants in only one real way: the food tastes different. That's it.
According to leadership, everything from real estate to investment costs to employee count to menu pricing is quite similar across all three chains. For managers of individual restaurants, it's almost like "plug-and-play" since the process of serving food is so similar across the board. That's the strategy, at least, and it's one that Ells believes will also set its restaurants apart from the also-rans:
It's much different than the kinds of growth strategies you hear about from all of our competitors who talk about, oh, we're going to open up 100 restaurants or 500 restaurants...You hear these sorts of things. To me, that's not a strategy.
What are the prices like? And how are the reviews?
ShopHouse: In D.C., according to reviews on Yelp, a bowl with protein, rice or noodles, and veggies priced out at $7 to $10 depending on the customer's selections. With 452 reviews to date, ShopHouse has an average rating of 3.5 stars.
Pizzeria Locale: According to reviews of the Denver location on Yelp, pizzas range from $7 to $11 depending on the ingredients chosen and time of day. Of 114 reviews, Pizzeria Locale garnered a 4-star average.
Can either concept make as much money as a Chipotle restaurant?
In the long run, management believes profitability could mirror Chipotle's. Here's what Ells had to say about the economics at another recent conference:
The economic model for both Pizzeria Locale and ShopHouse was built to be the same as Chipotle. So the potential for the economic models are the same. The one variable, though, is the sales. These are two new brands that are just starting, so obviously you don't have the same kinds of sales that Chipotle has. ... I think the huge potential here is to leverage our field structures so that the field managers can run all three different brands. And they're doing that now in Los Angeles and in Washington, D.C.
For perspective, Chipotle's net profit margin currently hovers around 10% and its three-year average return on invested capital is an impressive 24%.
Will they franchise either restaurant concept?
No. Chipotle owns all of its Mexican restaurants and intends to follow the same expansion formula with ShopHouse and Pizzeria Locale. Currently, Chipotle is an equity partner in Pizzeria Locale with restaurateurs Mackinnon-Patterson and Stuckey. Their contract gives Chipotle the option to become the majority shareholder as the restaurant chain grows.
What does a ShopHouse or Pizzeria Locale experience look like?
If you've yet to visit D.C., Los Angeles, or Denver to give either concept a try, take a look for yourself in the following videos:
The Motley Fool visits ShopHouse in 2012:
From the restaurant's website: the Pizzeria Locale experience.
Isaac Pino, CPA, owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill and Yelp. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.