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This Is Buffalo Wild Wings' Answer to Chipotle Mexican Grill

By Steve Symington – Aug 25, 2014 at 7:30PM

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Beer, wings, sports... and tacos? Here's what you need to know about B-Dubs' newest acquisition.

Buffalo Wild Wings stock

Beer, wings... and tacos? Buffalo Wild Wings announced a majority stake in Rusty Taco. Source: Rusty Taco.

Watch out Chipotle Mexican Grill (CMG 0.58%), because Buffalo Wild Wings (BWLD) is about to serve up some fresh competition.

On Monday, Buffalo Wild Wings announced it has purchased a majority stake in up-and-coming fast-casual chain Rusty Taco. Terms of the deal weren't disclosed, but shares of Buffalo Wild Wings rose more than 2% on the news.

Named for its co-founder, Rusty Fenton, Rusty Taco opened its first restaurant in Dallas in 2010 and distinguishes itself by offering affordable, freshly prepared street-style tacos in a "fun and lively atmosphere." Since then, Rusty Taco has grown to nine locations, including two company-owned restaurants and seven franchised locations between Dallas, Denver, and Minneapolis/St. Paul. 

Anything you can do ...
This also puts Buffalo Wild Wings in direct competition -- albeit on a very small scale -- with Chipotle's fast-casual Mexican approach. At its current size, however, Rusty Taco certainly doesn't represent an imminent threat given Chipotle's more than 1,600 locations. At the same time, Rusty Taco should be able to grow quickly from here. According to its website, the small chain enjoys a straightforward, simple concept and boasts "low start-up costs with a proven potential for high sales."

That seems fair enough, as growth for fast-casual restaurants is easily outpacing that of the overall casual dining industry. For that, investors can thank a combination of fast-casual chains' reasonable speed of service, high-quality food, and perceived value at only a small price premium to comparable quick service restaurant concepts.

At the same time, Buffalo Wild Wings' investment shouldn't come as a huge surprise. In April, Buffalo Wild Wings management even told Bloomberg they were searching for potential acquirees, and even had "one [brand] in particular we are looking at." Then, after increasing their minority stake in fast-casual chain PizzaRev last quarter -- and keeping in mind Chipotle jumped into its own fast-casual pizza chain late last year -- Buffalo Wild Wings CEO Sally Smith stated, "[We] continue to explore other investment candidates to build a portfolio of diversified brands for long-term sustained growth."

Chipotle isn't the only target
Better yet, Rusty Taco's all-day business model also help Buffalo Wild Wings lessen its dependence on the dinner daypart. 

A breakfast taco from Rusty Taco. Source: Rusty Taco.

To be sure, Rusty Taco serves a variety of breakfast menu items all day, including chorizo, bacon, jalapeno sausage, and egg and cheese tacos. This means Rusty Taco could ultimately provide a higher-quality alternative to the all-day wares from fast-food behemoth Yum! Brands' (YUM 0.67%) Taco Bell, which only just finished rolling out breakfast nationwide to mixed reviews a few months ago.

But it's also not a guaranteed win: Chipotle, for its part, decided to discontinue breakfast items earlier this year altogether, but a handful of locations after testing for a potential nationwide roll-out saw unimpressive results.

Foolish takeaway
So, where does that leave investors today? Though it's admittedly small today, Rusty Taco CEO Steve Dunn notes partnering with Buffalo Wild Wings should "have an immediate impact in helping accelerate our growth."

By comparison, however, the short-term impact on Buffalo Wild Wings won't be nearly as great given both its more than 1,000 locations as of the end of last quarter, and existing plans to expand to 3,000 locations over the long term. Even so, you'll be hard-pressed to find a Buffalo Wild Wings investor willing to complain about any incremental growth opportunities, especially those that offer Buffalo Wild Wings a chance to participate so early in the game. As a result, I think Buffalo Wild Wings investors are right to celebrate the long-term promise Rusty Taco brings into the fold.

Steve Symington owns shares of Buffalo Wild Wings. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill. The Motley Fool owns shares of Buffalo Wild Wings and Chipotle Mexican Grill. 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.

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