Chipotle Mexican Grill (NYSE:CMG) ranks 20th in Forbes' list of world's most innovative companies, and why shouldn't it. Since its spin-off from McDonald's (NYSE:MCD) eight years ago, the burrito maker has come a long way in delighting its customers, as well as its investors. It has not only delivered better-than-expected performance over the years, but also given competition to the biggest names in the space -- McDonald's and Yum! Brands (NYSE:YUM).
According to a report from Restaurant Finance Monitor, "Chipotle is arguably the most successful restaurant chain to hit the public markets since, well, McDonald's." Let's take a quick look at its performance in comparison with the bigger peers, and how the company is churning out such enviable profits.
Better than the best margin
Unlike McDonald's and Yum! Brands, Chipotle doesn't franchise its outlets and all its stores are operated by the fast food player itself. So, it's only fair to compare its performance against similar figures of McDonald's and Yum!. The following chart shows the company-operated restaurant level operating margins of the three players, and one can easily make out the preeminence Chipotle enjoys over the two.
While both McD and Yum! failed to hit the 20% mark in each of the past 10 quarters, Chipotle has been consistently reporting margins north of 25%, with the only exception being the 2012 fourth quarter -- that's something!
So what's driving Chipotle's success?
Chipotle's average revenue per restaurant has been increasing every year, from $1.76 million in 2008 to $2.17 million in 2013. This clearly suggests that the company is doing something that the consumers are liking and wanting. Here are five variables that are driving Chipotle's operating performance.
- Heavy foot traffic: Chipotle's concept of "Food with Integrity" has worked wonders for the company. The burrito maker strives to deliver the healthiest possible food using raw materials that have been sourced organically and locally. It's targeting the health conscious fast food crowd who are very particular about what goes inside their food. The company takes extra care not to use meat that's genetically modified, and in case they are short of their traditional stock of meat, they mention that to the consumers before conducting a sale. Such noble and transparent practices have resulted in the increase in store traffic by 12.3% during the second quarter.
- Pricing power: Chipotle commands a premium compared with rival quick service restaurants for its quality. Because of increasing food inflation, it had to raise prices earlier this year -- beef menu prices went up by almost 9%, while chicken menu prices surged around 5%. Overall average menu prices went up by 6.25% to 6.5% during the second quarter of 2014, for the first time in three years. Customers accepted the price rise and store traffic increased during the quarter. This indicates that American consumers are ready to take the price beating if they are assured of the quality of the food, and it highlights Chipotle's pricing power. In the second quarter, restaurant level margins increased to 27.3%, compared with 25.9% in the sequentially prior quarter.
- Efficient operations: Chipotle stresses on improving operations, and has streamlined its assembly line structure to perfection to increase throughput during rush hours. According to a Market Realist report, "Chipotle Mexican Grill was able to increase this output by eight transactions during both lunch and dinner peak hours, compared with last year. The transaction comparable grew 9.4% year-over-year during lunch and 13.3% year-over-year during dinner peak hours, compared to last year." More transactions ensure higher sales and better margins at the restaurant level.
- New concepts of food delivery: Chipotle hasn't restricted itself to just burritos and tacos. Apart from offering simple and distinctively customizable menu spread that offers over 65,000 combinations of food items at the Chipotle outlets, it has started serving Southeast Asian specialties through its ShopHouse format, thus attracting more and newer customers. The company calls ShopHouse "a tribute to the inspiring food culture of Thailand, Vietnam, Malaysia, and Singapore." Through its partnership with Pizzeria Locale, the Denver-based company has started a similar culture of offering customizable pizzas.
- Effective marketing: Chipotle's well thought out marketing strategies are creating excellent brand awareness for the burrito maker. With all rival chains vying for attention, the company understands how crucial it is to be present in the customer's mind. So, it's taken the help of online media (YouTube and Hulu) to gain traction. It's rolled out a series of videos, named Farmed and Dangerous, which take a stand against genetically modified food, and showcase the healthy quality of its offerings. According to Forbes, "Chipotle goes beyond the info-video and veers into edu-tainment."
To drive home the point, it can be said that Chipotle's ability to attract customers and gain operational efficiencies is behind its success. It surely takes a lot for a quick-service restaurant chain to maintain such a positive reputation and offer innovative items, and the burrito maker is pulling it off beautifully.
ICRA Online and Eshna Basu have 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.