If you've ever suffered through the unfulfilled hankering for a great burrito, you're in luck. Because the country's arguably best burrito chain could be headed your way soon.
I'm talking about Chipotle Mexican Grill (CMG 2.91%), of course. But that's not to say Chipotle hasn't seen impressive growth so far. As of the end of June, the fast-casual chain had already grown its presence to a whopping 1,681 locations since its founding in 1993.
But Chipotle isn't done yet. Last quarter, management not only confirmed they're on track to open 180 to 195 new restaurants in 2014, but also stated they have a "strong pipeline of potential sites going into next year and beyond." At an investors' conference earlier this year, Chipotle co-CEO Steve Ells even insisted, "Our potential is 4,000 [units] and likely greater."
Actually getting there, however, will prove an entirely different beast, especially given today's increasingly competitive real estate environment.
Getting big by going small
That's why, when Chipotle does arrive in your neighborhood, it may not be in the form of its traditional larger-format stores, which historically accounted for most of its early growth. Instead, Chipotle is increasing its focus on smaller format restaurants going forward.
These are some lucrative burritos. Credit: Chipotle Mexican Grill.
This concept isn't entirely new for investors. Chipotle technically unveiled its small format "A Model" strategy back in 2010, from which it doubly benefits through lower occupancy costs and reduced operating expenses. In addition, A Models opened up a host of new trade areas and sites Chipotle previously wasn't able to consider, allowing it to accelerate its growth plans.
"Really, really, really small."
But more recently, Ells said they've realized, "Chipotle is welcome in more places, in more locations than we ever would have thought before, and so we are able to take a little bit more risk in going into some trade areas that are a little bit off the beaten path."
Chipotle CFO Jack Hartung later commented,
[W]e're looking at some sites right now in the United States as well where these stores would be really, really, really small, and where we'd be very limited in seating. I think that there's a number of reasons why we think that is a good idea, one of which is that, whereas we used to be mostly a dine-in restaurant 14 years ago, and I'd say about eight years ago we were 50-50 dine-in, take-out. Now we're about two thirds take out.
Translation? Don't be surprised if Chipotle pops up not only with more small A Model restaurants, but also in places like malls or end-cap locations at retail shopping strips.
Part of that, Hartung elaborated, is due to the fact that "people know who we are [...] now that the brand has been more established." As a result, Chipotle doesn't need to worry as much about new consumers not getting the full Chipotle dining experience.
But investors also shouldn't forget Ells referred to this as a "risk." By sacrificing seating with tiny takeout-centric locations, Chipotle is taking the risk of not being able to dictate the full experience -- including its enjoyable atmosphere and likable "Food With Integrity" mantra -- to new diners who aren't as familiar with the brand. If that happens, same-store sales could suffer if those diners find themselves less inclined to keep coming back for more.
Here's what's at stake
Make no mistake... the bar is set high: Last quarter, Chipotle's new restaurants saw opening sales volumes in the range of $1.7 million to $1.8 million, while same-store sales jumped an incredible 17.3%. Meanwhile, restaurant-level margins came in at an impressive 27.3%, despite pressure from higher food and marketing costs. When all was said and done, Chipotle had grown revenue by 28.6%, which translated to a 24.1% increase in earnings per share -- not too shabby for a company valued at more than $20 billion today.
In the end, time will tell if Chipotle's even smaller-format strategy will pay off. But with Chipotle stock trading within a burrito's throw of all-time highs, investors clearly are pleased with the results so far.
