Chipotle Mexican Grill (NYSE: CMG) and Qdoba Mexican Grill both trace their founding to the mid-1990s. Each offers fresh, high-quality Mexican food at a reasonable price, and they both serve their customers in an assembly line fashion. Some of the stores even look quite alike.
So why are these two burrito contenders performing so differently? Chipotle recently posted same-store sales growth of 8.7%, and it expects to operate roughly 13% more locations by the end of this year. Meanwhile, Qdoba is only forecasting comparable sales up 2%, and a 3% increase in store count. Chipotle ended the quarter with 1,001 restaurants; Qdoba had only 515.
Chipotle is blowing past its competition, and it's important to understand why.
It's the economics, stupid
From the moment the two restaurants are built, Qdoba is at a disadvantage. For 2009, the average Chipotle brought $1.73 million in annual sales and notched 24.9% in store operating margins. A Qdoba can only expect to do about half as well on both measures. That leads to dramatically different unit economics. For every $100 that Chipotle invests in a new store, it can expect to earn $51 back in the very first year. Qdoba can only expect about $19.
That trend is continuing in Chipotle's favor. The company's average store sales have increased by 20% in the last 5 years. Qdoba's have actually decreased by 1.5%.
Restaurant unit economics
|
Metric |
Chipotle |
Qdoba |
|---|---|---|
|
Sales |
$1,728 |
$905 |
|
Operating Profit |
$430 |
$118 |
|
Operating Margin, % |
24.9% |
13% |
|
Development Cost |
$850 |
$610 |
|
Return on Investment |
51% |
19% |
Non-percentage numbers in thousands. Data for average store in 2009.
There are countless potential explanations for Chipotle's outperformance. It could be that its larger size gives it better name recognition. Perhaps it learned a thing or two from its days as a McDonald's (NYSE: MCD) subsidiary. Or maybe it's just the company's secret sauce. Bottom line: Chipotle makes a phenomenally high return on its investment.
I'm not knocking Qdoba and its parent, Jack In The Box (NYSE: JACK). A 19% return would make most American businesses jealous. It's enough to create a long line of willing franchisees, and companies like Yum! Brands (NYSE: YUM) and Wendy's / Arby's (NYSE: WEN) have made a killing by going down that franchising route, which offers high margins.
But the real big money is always made by the market leader. Just look at the recent private-equity buyout of Burger King (NYSE: BKC). The No. 2 fast-food chain had some 12,000 restaurants and sold for a sum of $3.26 billion. McDonald's and its 32,000 stores trade north of $78 billion, and the Golden Arches remains the dividend play of a lifetime.
The Foolish bottom line
So what about Chipotle's stock as an investment? As Motley Fool advisor Ron Gross has pointed out, there's already a lot of growth priced in. The two most important questions for investors are: How many more restaurants can Chipotle build, and how profitable will they be?
With only 1,001 restaurants so far, the chain has a lot of room to expand just in the United States. If it gains international appeal, then the growth possibilities are much, much larger. International restaurant operators, such as Yum! and McDonald's, have easily taken their store base into the tens of thousands. And if the economics of each restaurant stayed the same, then little would stop Chipotle's soaring stock price. After all, a leader like that deserves a rich premium.
