It's hard to argue against the idea that Chipotle (NYSE:CMG) and Shake Shack (NYSE:SHAK) can be considered direct competitors to a certain degree. The restaurant industry is an aggressively competitive one, and both companies operate in the fast-casual category, charging a few extra dollars over typical fast-food chains and offering superior ingredients and a more comfortable atmosphere, while at the same time maintaining the speed and simplicity of the fast-food industry.
Both companies are also focused on health-conscious consumers, offering products free from GMOs and providing hormone- and antibiotics-free meat. It doesn't sound like much of a stretch to say that Chipotle and Shake Shack target a remarkably similar customer base, and this has clear implications when it comes to the competitive dynamics between these companies.
Chipotle CEO loves Shake Shack
However, things are not necessarily as they seem. In a recent interview with Brian Sozzi from The Street, Chipotle co-CEO Monty Moran explained that he is actually happy when he sees Shake Shack doing well. In his own words:
When you come up with something like Shake Shack, or any better burger concept, or anyone doing a decent job making food that's respectable and decent to eat, such competition, I think, is good for us. Not good because they are going to take market share from us, as I think they don't tend to take market share. What happens instead is that people get used to a higher level of eating, and once they get used to that, they will not go back to traditional fast food.
I am just happier than hell when I see Danny Meyer's Shake Shack doing well.
The new fast-food paradigm
From Moran's perspective, there are basically two kinds of fast-food companies. On one hand is McDonald's (NYSE:MCD) and the other traditional big chains that typically rely on marketing firepower, price competitiveness, and commercial strategies such as limited-time menu items in order to drive sales growth. Things are not going well for these players lately, and McDonald's is perhaps the most representative example.
The House of Ronald McDonald reported a big decline in sales of 10% year over year during the second quarter of 2015, with global comparable sales falling 0.7% on the back of negative guest traffic on all major segments. This was not an isolated event; McDonald's has been facing stagnant or even declining sales since 2013.
Consumers are clearly much more inclined toward the superior food offered by companies such as Chipotle and Shake Shack, especially millennials, who are a key demographic segment in the industry. Making things worse for them, McDonald's and its peers are focusing on the wrong variables when it comes to their efforts to bring customers back to their stores.
Moran said in the interview:
If you look at how McDonald's is reacting to its problems, or how any of these fast food folks are reacting, what you will see is almost nothing about making the food actually higher quality. It's just not one of the knobs they turn. They talk about better marketing, more product development, and better pricing strategies.
But none of these things are about making the food better. No one is considering it. That is just, goddammit, not what is going to attract customers. People are actually looking for better food.
According to Moran, companies such as Chipotle and Shake Shack win when competitors like McDonald's lose. As consumers are getting used to expecting and demanding better quality food, Chipotle and Shake Shack are both on the right side of the trend, and they have a lot of room for market share gains against the traditional fast-food chains.
To put the numbers in perspective, Chipotle is expected to make $4.7 billion in revenue during 2015, while Shake Shack is forecasted to bring in only $180 million in total sales for the year. McDonald's, on the other hand, is still an industry juggernaut, with $25 billion in forecasted sales for the year.
When Shake Shack is doing well, that means more customers are moving away from the highly processed and artificial ingredients offered by McDonald's and similar chains and toward the higher-quality food offered by Shake Shack and Chipotle.
With this in mind, it's no wonder the Chipotle CEO is happy to see that customers have a big appetite for Shake Shack's burgers.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns and recommends 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.