There has been much debate around both Wall Street and Main Street if fast-casual concepts like Chipotle Mexican Grill (NYSE:CMG) are growing more at the expense of traditional fast food or more at the expense of casual dining. With many fast food chains such as McDonald's (NYSE:MCD) and Burger King (NYSE:BKW) still growing over the years (despite recent soft patches in the U.S. for Mickey D's), it does still show for many people a Chipotle burrito is just no substitute for an old-fashioned burger when the craving is there. However, the new threat to fast food may be like Chipotle on all-natural steroids.
The fast casual burger
Now this may be a very real threat the burger joints can't deny and even Chipotle is at risk. For most of us, Mexican food of any kind has always been a once-in-a-while treat and not a super-frequent occurrence, depending on the region. Americans, however, devour three hamburgers per week, on average. For example, McDonald's alone in the U.S. has almost as much sales annually as the entire Mexican restaurant industry combined.
The burger desire is hardwired into our cultural DNA and not going to magically disappear anytime soon. No matter how mouth-wateringly delicious a Chipotle burrito may be, it won't satisfy weekly burger cravings for most people. There will always be a market for chopped steak on a bun, but none of the Mexican fast-casual places will ever replace the ultra-popular burger -- except maybe the new style emerging from Shake Shack and others.
Don't let the shack name fool you
Generally when you think of shack you probably think of a tiny primitively constructed home. In the case of Shake Shack it is more of a play on words as the chain sees itself as serving up fine dining quality burgers via a fast-casual delivery process. Shake Shack is still a tiny chain with 56 restaurants, up from 48 the last time I wrote about the company four months ago. The company is planning to IPO sometime in the near future.
The bigger threat according to food and restaurant consulting firm Baum + Whiteman is not just from Shake Shack by itself but, as Nation's Restaurant News put it, there are "many high-end restaurateurs who are opening more casual locations." If the Shake Shack IPO strikes gold, as Baum + Whiteman says, it could lead to a fury of other fast-casual burger chains popping up. Then further public awareness of burger fast-casual restaurants could lead to no more denying there is a very real threat to the McDonald's and Burger King burger staple.
We don't need no stinkin' discount
Maybe Co-CEO Steve Ells of Chipotle has a point that will cause McDonald's and Burger King to suffer long term. In the last conference call he stated,
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.
I'll add that, again, consumers are tired of low quality and gimmicks, but they still want their burgers and aren't ready to give them up and start eating only burritos and pasta bowls. Ells added,
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.
Solution: Un-cheapen the ingredients and up the dining experience. Enter the fast-casual burger.
Where's the un-shredded beef?
Shake Shack certainly isn't the only one going fancy-casual. There is the 200-plus unit Smashburger chain that's only seven years old and just getting started. Then you have the Fatburger chain with only 150 restaurants now but already 300 more in planning for development. As a third example there is The Habit Burger Grill that just had its IPO. It grew its sales 40% from 2012 to 2013 alone and now sits with 109 locations.
You get the idea. All of these little chains quickly start adding up to some serious fire power in the burger wars. McDonald's and Burger King had enough problems worrying about each other, but they both seem to have held their own reasonably well despite the exploding popularity of Chipotle. Now add this growing army of Chipotle-like burger joints and the real burger battle may just be beginning.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. 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.
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