Please ensure Javascript is enabled for purposes of website accessibility

Chipotle's Latest Mystery Isn't What You'd Expect

By Jeremy Bowman - Apr 4, 2016 at 11:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Chipotle surprised the market last week with news that it was considering launching a burger concept.

Chipotle Mexican Grill (CMG 1.70%) wants to get into the burger business. Or so it seems, as Bloomberg reported that the company has filed a trademark application for the name "Better Burger." Chipotle spokesman Chris Arnold said that the name "was a growth seed idea" the company is exploring. He also noted the company has two current seed concepts, ShopHouse Southeast Asian Kitchen and Pizzeria Locale, and that management has mentioned that the model could be applied to other foods. 

At this point, a trademark application doesn't necessarily mean a new chain will spring up, but it seems like a strange avenue for Chipotle to pursue, especially as the company works to recover lost sales after its recent food-borne illness outbreaks. Here are several reasons why a better burger chain might not fly for Chipotle.

1. The better burger market is already crowded
There are several hot concepts already jockeying for position in the fast-casual burger market, many with big expansion plans. Among them are Shake Shack (SHAK -2.76%)Habit Restaurants, Five Guys, In-N-Out, Smashburger and others. Even McDonald's has tinkered with the idea of offering a more gourmet option, testing a Create Your Taste menu that allows patrons to customize their burgers with toppings like guacamole and grilled mushrooms.

Some observers have speculated about a "burger bubble" as higher-end versions of the classic ground beef sandwich have become trendy in recent years. However, all of the names above plan to add stores in the coming years. Shake Shack says its aim is to grow from 44 locations today to 450 nationwide. Habit sees 2,000 as its goal, and Five Guys plans to add another 1,000 after growing to more than that milestone over the past decade.

Many of these brands, like Shake Shack and In-N-Out, already have die-hard followings, meaning the bar for a company like Chipotle to impress with a burger would be exceptionally high. Chipotle would be probably be better off tackling underutilized concepts, as it did when it launched its fast-casual burrito chain more than 20 years ago.

2. The company already has two seed concepts
Investors have been waiting for years for Chipotle to accelerate the rollouts of ShopHouse and Pizzeria Locale. Management has touted the promise of the two concepts on earnings calls in the past, and has used their annual Chipotle Cultivate Festivals to promote them. However, progress has been slow.

Five years after it first launched, ShopHouse has just 14 locations nationwide in three markets. Chipotle's namesake concept, on the other hand, had about 500 restaurants when it IPO'ed 13 years after the first one opened its doors. It's possible that ShopHouse will scale up to 500 locations in another eight years, but it doesn't look likely at this point. Pizzeria Locale has been even slower to expand, with just seven locations to date. 

Chipotle's interest in a burger chain may indicate that its two seed concepts aren't performing as well as expected. Three thriving concepts seems, with Chipotle included, like plenty of growth for the company to manage without the need to add a fourth. Many restaurants have failed trying to launch a sister concept, and even Yum! Brands, the best-known multiconcept fast-food chain, only has three major brands: KFC, Taco Bell, and Pizza Hut.  

3. Burgers just aren't well-suited to the Chipotle model
When explaining the seed concepts before, Chipotle management has said that they believed that their model -- serving customizable meals created assembly-line-style, the way your order is made at Chipotle -- can be applied to a wide variety of cuisines. ShopHouse, which serves customizable rice bowls, fits this model perfectly. Pizzeria Locale, which allows patrons to select toppings before the pizza is cooked, also seems well-suited to it.

Burgers, however, aren't meant to be prepared on an assembly line with a steam table; they're best consumed hot off the grill. None of the better burger chains use a Chipotle-like model, but other companies have employed a similar model for other foods like salads or Mediterranean cuisine. Chipotle could choose to offer a variety of patties or topping choices, but that's already been done by multiple competitors. Five Guys, for example, offers a choice of 15 toppings. 

Of course, Chipotle doesn't have to stick with the assembly line for a better burger concept, but designing a new service model to make it work would seem to undermine its whole argument of extending the model. So it seems unlikely to find a sustainable competitive advantage in the burger biz.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,294.11 (1.70%) $21.62
Shake Shack Inc. Stock Quote
Shake Shack Inc.
SHAK
$41.98 (-2.76%) $-1.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.