Chipotle Mexican Grill (NYSE:CMG) has a strong track record of profitable growth. This history combined with expectations that the company can double its current footprint and reach 3,000 locations in the United States is a primary driver of Chipotle's lofty valuation multiples. While domestic expansion is certainly a significant growth driver for Chipotle in the near term, there are a number of additional opportunities for Chipotle that are often under appreciated.
Revenue per restaurant has room to grow
Chipotle generated average unit sales of $2.1 million over the past year according to its most recent earnings release. While this may not seem particularly special when compared to fast-casual rival Panera Bread's (NASDAQ:PNRA.DL) $2.4 million average sales per location, this is not an apples-to-apples comparison; Panera boasts significant breakfast, catering, and bakery businesses that Chipotle does not possess. Panera's additional revenue also comes at a cost in terms of larger restaurant location requirements and longer store hours. Most Panera locations open at 6:00am, five hours before the typical Chipotle; this is a primary reason that Panera's labor and occupancy costs (37% of revenue in the most recent quarter) are dramatically higher than Chipotle's (29% of revenue), even when factoring in the benefit of Panera's breakfast revenue.
For a better comparison, fast casual burrito rival Moe's Southwestern Grill is estimated to generate just under $1 million in sales per location according to Nation's Restaurant News. With this context, it is impressive that Chipotle drives double the sales volume per location as its peer Moe's and approaches the sales volumes of Panera with smaller restaurants and shorter hours.
Chipotle began to roll out a catering program during 2013 that is expected to be available in all markets during 2014. While catering comprised less than 1% of total sales for Chipotle in the most recent quarter, management is excited about the possibilities and has noticed an acceleration in revenue as customer awareness ramps up. Panera is estimated to generate 8% of sales from catering, and there is no reason to doubt Chipotle's ability to grow its catering to a similar level.
While Chipotle's management has never confirmed plans to introduce breakfast across the company's footprint, the availability of breakfast burritos at certain airport locations, testing of chorizo as a meat option, and a relationship with La Colombe coffee has led to plenty of speculation that the company may be poised to add breakfast burritos to its list of revenue growth opportunities.
In addition to catering and breakfast, there is a far more obvious way to generate revenue growth: price increases. On its most recent call with investors, CEO Steve Ells laid out the groundwork for a 3-5% price increase in 2014; while this seems barely significant, one such price increase can translate into an extra $100,000 in revenue per year at each Chipotle location.
International expansion opportunities
While Chipotle's experimentation in international markets has evolved slowly, it is the result of a deliberate plan to build its brand rather than a reflection of a lack of success or market opportunity. With just 14 locations in Canada, United Kingdom, France, and Germany, there is plenty of room for the Chipotle concept to be rolled out worldwide.
The potential is staggering based on the success of domestic fast food and casual restaurant chains. For example, more than half of Yum! Brands' (NYSE:YUM) 39,000 locations are located outside the United States; in fact, there are almost as many KFC locations in China (4,260) alone as there are in the United States (4,618). Yum Brands' success bringing KFC, Pizza Hut, and Taco Bell to countries around the world is just one example of this type of success; established chains ranging from McDonalds to Starbucks have successfully opened thousands of international locations.
Investors should expect Chipotle's international growth to significantly ramp up in a few years, once management is confident that it has the right team, product, and strategy in place to expand aggressively in Europe. Based on the company's track record of methodical expansion, opening of a handful of test locations in Asia would likely be a precursor to another wave of growth further in the future.
Think outside the tortilla
Perhaps the largest long-term potential for Chipotle's growth has surprisingly little to do with burritos. Ells eloquently summed up his vision in the context of the opening of the company's third ShopHouse Southeast Asian Kitchen concept:
"ShopHouse is the first test of our belief that Chipotle success is not dependent on serving burritos and tacos but rather is rooted in our commitment to finding the very best ingredients, preparing them using classical cooking techniques, welcoming our customers into a space that is thoughtful and that says something about the food we serve and developing teams of top performers that are empowered to achieve high standards and create a welcoming customer experience."
The second test of this belief will be the development of Pizzeria Locale, a fast casual pizza concept with just one location at this time. Like ShopHouse and international, Ells remains committed to perfecting the concept prior to aggressive roll out. However, the long-term opportunity is tremendous if Chipotle can roll out one or more additional concepts nationwide.
Numerous growth opportunities
Chipotle offers investors growth opportunities that are both short and long term. In the near term, it is reasonable to expect a continuation of the company's rapid domestic location growth and increases in average revenue per store. Looking out over the long term, Chipotle is positioning itself for tremendous growth internationally and through the development of new fast casual concepts such as ShopHouse and Pizzeria Locale. In combination with the strengths of Chipotle's business model, this opportunity creates a solid growth thesis for investors.