Readers, I hope you will forgive the dumpster fire that is the comments section in my latest Chipotle (CMG) article on Seeking Alpha. As you can see, I got into it quite a bit with people who were not so happy about getting reported for being offensive. Of course this was a huge waste of my time, but I often find it difficult to ignore people who draw attention to themselves by being obnoxious. In the future I will try to follow the advice of the user who recommended that I “grow a thicker skin.”
On the other hand, I am very grateful toward those who enhance the discussion by offering polite criticism, and I also take note of those who have kind things to say about me and my work.
Anyway, back to the highly contentious topic of Chipotle Mexican Grill. As you know, the stock has continued to plunge in the few days since the article was published, and it may yet drop even more. If my recommendation in any way influenced you to buy shares over the last six months, I hope you plan to hold for the long run. Indeed, this is a great opportunity to buy even more and lower your cost basis (which is what I have been doing). If Walmart ran a 20 percent off special on toothpaste tomorrow, you wouldn’t feel awful because the price dropped. In fact, you would probably feel excited. After all, who doesn’t like a good sale on quality merchandise? For some reason, though, people don’t think about the stock market in the same way.
Since I have already written several articles about why Chipotle is quality merchandise, I won’t get too much into that. One thing I haven’t done though is speculate about what the company could do to drive growth beyond what they have already made public. Usually I think such exercises are pretty pointless, because one should only invest based on what is, not what might be. But I figure we could all use a bit of optimism after this lousy trading week.
- International expansion
Chipotle right now only has a few restaurants overseas and in Canada, which is why my own valuation does not take international expansion into consideration at all. Plus Chipotle has struggled to create the same sort of excitement and popularity in the U.K. and France, which a number of people in the business press have noted. But that doesn’t mean that the chain won’t get there in time. Brands aren’t built overnight, and it takes many years to form a connection with customers.
Even in the U.S., I think that a lot of Chipotle’s appeal stems from its familiarity. I recall CMO Mark Crumpacker explaining that many patrons still look fondly on afternoons spent at the restaurant with friends after high school classes. These emotional attachments created during formative years tend to last for life, which is why a company like McDonald’s (MCD) has succeeded for many years despite consistently bombing taste tests. Many kids are introduced to Happy Meals at an early age, and they learn to associate McDonald’s with comfort.
Some commentators claim that Chipotle can’t succeed overseas because Mexican-style food is not as popular in other parts of the world. I think that is pretty silly, though. Who would have thought fifty years ago that China, a society where people eat with chopsticks and prefer small bits of meat, rice, tea, and lots of veggies, would become one of the biggest markets for chains serving hamburgers, coffee, and fried chicken?
Before the crisis Chipotle was one of the most profitable restaurant chains in the country, achieving average annual sales per square foot of $840 and over $2 million per store overall. That’s astounding when you consider that the chain doesn’t even serve breakfast.
Over the years Chipotle has been loath to mess with its minimalist menu. As I have said over and over again, keeping things simple is one of the company’s major strengths. But if management can find a way to make additional menu items work without increasing complexity too much, then I’m all for it.
About four years ago Chipotle tested breakfast burritos and coffee in its airport locations, where it was contractually obligated to open early in the morning. Although the the items earned very good reviews from customers, the chain ultimately decided not to further pursue breakfast.
However the idea never truly died, and as recently as last year CEO Steve Ells stated that it was still under consideration. I would rather see the company try to get its newer items just right rather than rush them out in the interest of short term gain.
Two items that appear more imminent are queso and dessert, the former of which customers have long asked the chain to serve. Of course a gooey dish that requires artificial ingredients to keep the cheese in liquid form would seem to go against Chipotle’s model, but the company claims to have come up with its own all-natural version. Chipotle also plans to roll out churro, a Mexican-style fried tortilla dessert. Sweets are often a very high margin item for grocery stores and restaurants, so one can reasonably expect that the benefits will outweigh the costs.
Back in the late 1990s and early 2000s when McDonald’s owned a large stake in Chipotle, the fast food giant pressed executives to add drive-thrus to its restaurants. Steve Ells vehemently opposed this idea, and the two companies eventually parted ways over this and other philosophical differences.
Ells’ thinking probably stems from the fact that the chain’s iconic interior format is an integral part of the experience. He wanted customers to come through the doors so they could watch their food being prepared in an open kitchen and see the fresh ingredients laid out beneath the sneeze screen. In new markets where people were not familiar with the format and menu, drive-thru probably would have been a disaster.
Now that customers around the country are intimately familiar with Chipotle’s menu, I think the drive-thru concept is much more feasible. Indeed, many people I know get the same thing every time, which would cut down on delays from indecisive consumers.
Lately Ells has seemed more open to the idea after witnessing its success at the Chipotle-owned Tasty Burger restaurants. Although he remains adamant that drive-thru takes away from the Chipotle experience, Ells stated in 2012 that “it’s certainly something that we could try in the future.”
Despite its success in upending fast food, Chipotle remains a relatively cautious company. In addition to the unchanging menu, Chipotle has no debt, does not pay a dividend, and carries almost $600 million in cash on the books. All of these attributes make Chipotle an extremely attractive investment, but over time I think we can expect that the company will continue innovating when and where it is appropriate. At the current share price, I think that investors will earn at least five times their money over the coming decade. Even when I said the company was a buy at $500 a share, I believed (as I do now) that investors would quadruple their money.
Maybe the shares will keep going down. Maybe they won’t. Nobody knows what will happen with the price, and those who try to time will mostly fail. What I do know is that the case for Chipotle is so transparently obvious that I would be a fool to wait for a lower price that may never materialize.