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Last Week's Restaurant News Flipped Over Burgers

By Motley Fool Staff - Apr 10, 2016 at 3:16PM

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McDonald’s plans to expand into China, and Chipotle’s plans to expand into... burgers?

It was a big day for burgers last week. On the same day McDonald's (MCD 2.14%) announced big plans to expand into China, news broke that Chipotle Mexican Grill (CMG 1.70%) had filed to trademark the name "Better Burger."

In this segment from The Motley Fool Money radio show, Chris Hill, Ron Gross, Jason Moser, and James Early, talk about a few grease fires that might slow down McDonald's China plans. Then, what we can expect from Chipotle's Better Burgers, if their Pizzeria Locale and ShopHouse restaurants are anything to go by.

A transcript follows the video.

This podcast was recorded on April 1, 2016.

Chris Hill: The burger wars are heating up, McDonald's CEO Steve Easterbrook says the company plans to add 1,300 new restaurants in China. This news came on the same day that McDonald's got a new competitor, Chipotle filed to trademark the name Better Burger.

James Early: What could go wrong?

Hill: What could possibly -- let's start with McDonald's, though. This is a big expansion that they're looking to make in China.

Ron Gross: Really big. And they've struggled in China. They're actually closing 90 restaurants in China. In 2014, they had some supply issues where supplies of chicken and burgers were not available. And they're still trying to regain the trust of Chinese consumers, who are actually pretty wary about some fast food concepts. So, they have an uphill battle there. But, as you said, it's a very big expansion. They'll franchise them -- which typically, in China, people get nervous about, because you want to have some control. It'll be interesting to see how it works out with them giving up the control to the franchisors. But, it's a huge market, as we know. It does make sense. It's all going to be in the execution.

Jason Moser: And remember, there's going to be more competition in that market too, with Yum! Brands (YUM 1.77%) splitting off their Chinese operations. While Yum! Brands has Pizza Hut and KFC in China, Taco Bell really doesn't have a presence at all, but they are gunning to change that. Now, how Taco Bell is received among the Chinese population is yet to be determined.

Early: In general, Mexican food is not hot there. Pizza Hut is a luxury restaurant in China, you know that? They've got fancy wines, steaks, it's a hot date type of place.

Moser: Bit of a similar dynamic when we were living in Cairo, Egypt, too. Pizza Hut and KFC, to a lesser degree, but certainly Pizza Hut.

Hill: I'm a little torn on the Chipotle news, because on the one hand, diversifying as they have with ShopHouse and Pizzeria Locale, and now, presumably, a burger chain, diversifying makes sense to me. On the other hand, I look at the troubles they've had over the last six months, and I think, you know what? Given that, to date, they've only opened about a dozen ShopHouse restaurants... they've had that concept for years, but they've only expanded to about 12 or 13. There's only about three Pizzeria Locales. So, they're clearly taking a very slow approach with this.

Moser: Yeah. I don't think that would be any different with the burger concept. I think what'll happen is they'll open up one store. They'll test it for probably about a year, trying to figure out what they can do to differentiate themselves. Like you said, the burger market is a very big one, it's very saturated. If you're going to be successful, I think you have to do two things. You have to put yourself in markets where the demand is probably there, and then you have to do something a little bit different.

The thing about burgers, they tend to breed fairly loyal followings. I mean, for everybody that likes Five Guys, you have another contingency that'll say, "No! I think Burger Joint is better!" Or, Elevation Burger, or something else we've never even heard of. So I think there's plenty of room to play in this market, just like there is in the pizza market. It's just figuring out what they can do to differentiate themselves, because we know that the model there works fine.

Gross: Agreed, the model works fine. I just think the burger market is just too saturated, there's just too many burger joints out there. It's the new cupcake. You know? Every place was a cupcake place a few years ago, and then they all closed down, and then all the--

Early: Are you a burger aficionado yourself?

Gross: I'm not. I like a burger--

Early: You seem like you would be. I don't know why I think that, but you just ...

Hill: He's clearly anti-cupcake.

Gross: But yeah, there's too many choices, and I can't imagine they'll differentiate themselves in any major way from all the other choices out there. So, hey, go slow, take a measured approach, test it. But I don't see it being a big deal.

Moser: And I would say to investors in Chipotle today, take solace in knowing that they will take it slowly. And if it doesn't work, they will bag it. I mean, this is not going to be something where they're rolling out 50 burger joints a year, now, in the hopes of overtaking this market.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$233.91 (2.14%) $4.91
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,294.11 (1.70%) $21.62
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$111.92 (1.77%) $1.95

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