Chipotle Mexican Grill (NYSE:CMG) is arguably the most explosive growth story in the restaurant industry since McDonald's (NYSE:MCD) or Subway. While traditional fast-food players are facing stagnant or even declining same-store sales, Chipotle is clearly booming.
Let's take a look at a few important quotes from Chipotle's management team explaining how the company is planning to continue disrupting the industry and hurting competitors like McDonald's in the years to come.
The secret sauce for success is not such a big secret after all
Calling Chipotle a success could actually be an understatement; the company is delivering growth rates that are truly exceptional for a restaurant chain of Chipotle's size. Total sales during the third quarter jumped 31.1% to $1.08 billion, while same-store sales grew by an impressive 19.8% during the period.
Price increases had a big positive impact on performance during the last quarter, and management is expecting growth during 2015 to slow down to a low- to mid-single digits increase in comparable restaurant sales. Still, even in a slowdown scenario, Chipotle would be doing markedly better than almost every competitor in the industry . By comparison, McDonald's announced a decline of 0.5% in global comparable sales during October.
Steve Ells, chairman and co-CEO of Chipotle Mexican Grill, explained in the company's latest conference call that there is no big secret when it comes to Chipotle's recipe for success, management is simply focused on providing the best possible food and service to customers:
While our performance has been particularly strong this year, our results have been solid throughout our history as a public company, even through the depths of the recession, and I am often asked how we continue to perform so well. The fact is there is no great mystery to it. Our ability to generate such strong sales growth is the result of our commitment to serving the best tasting food we can. Food that is made with ingredients from more sustainable sources and prepared using classic cooking techniques, and our commitment to having teams of top performers in our restaurants who are empowered to provide an extraordinary customer experience.
The competition is going in the wrong direction
Companies like McDonald's have relied on scale, highly processed ingredients and cost reductions across the board to offer competitively low prices. However, consumers seem to be more than willing to pay a few extra bucks for superior food and experience.
Steve Ells quoted a Consumer Reports survey of more than 32,000 fast-food consumers, and results are quite telling: Chipotle Mexican Grill came at the top of the list when it comes to preferences, while McDonald's was ranked in the last position.
According to Ells:
The traditional fast food sector has traded food quality and taste for low cost and ease of preparation. It has aggressively marketed low prices to entice customers to visit more often which has resulted in the need to reduce cost by cheapening ingredients and by compromising the overall dining experience. We have not made these compromises because our fundamental belief is that in order to provide an extraordinary customer experience you cannot take shortcuts.
The gimmicks that have driven the fast food sectors for years, dollar menus, limited time offers, and merchandising partnership are not producing results like they used to as consumers simply want better tasty nutritious food at a more compelling experience, not gimmicks.
In some cases, these other companies are looking to revamp their branding efforts to change their customer's perception but not the food. Fundamentally these are short sighted reactions that seem out of touch with what customers want, better food and a more compelling dining experience. This is exactly what we offer at Chipotle and we think it's replicable with other kinds of cuisines.
It's just the beginning
Considering the staggering demand Chipotle is seeing from consumers, the company still has a lot of room for expansion, both in the U.S. and in global markets, which are still practically untapped. Not only that, but management intends to replicate its approach to Mexican cuisine in Asian food and pizza with two new concepts: ShopHouse and Pizzeria Locale.
The company is not only trying to sell more burritos; Chipotle is changing the way consumers think about food and restaurants. If management can replicate with different concepts the mouthwatering success it's achieving with Chipotle, then the company will inflict a lot of damage to the competition.
We are in the early stages of developing two new fantastic restaurants, what we call our growth feed concepts, ShopHouse Southeast Asian Kitchen and Pizzeria Locale. Using the exact same model that has driven Chipotle's success, each of these concepts shares our commitment to using only the very best ingredients, the classical cooking techniques, and to building cultures of top performers who are empowered to achieve high standards.
Chipotle's success over McDonald's and other traditional industry players is based on a simple but powerful idea, superior food and a comfortable atmosphere. That's easy to understand, but it can be tremendously hard to implement. It`s not only about strategy, it requires a very particular culture and a talented workforce.
The fast food industry is changing, Chipotle Mexican Grill is not only a considerable driving force behind that change, but also one of the main beneficiaries from it.
Expectations are high, and Chipotle is priced for aggressive growth, so the stock is certainly vulnerable to any disappointment in the short term. However, on a long term basis, Chipotle should continue outgrowing the industry by a considerable margin.
Any dips which may arise down the road could be considered a buying opportunity in this spicy and unique burrito maker.