Monday, September 12, 2011

Fortune - Chipotle's (CMG) Growth Machine

Chipotle Mexican Grill (CMG) has been one of the stars of the market the past half decade [Oct 30, 2007: Chipotle Mexican Grill - The One Impervious Restaurant Stock], as its a high growth company, in a country staved for public companies still in early to mid stages of growth.  One lesson this market has taught is that as long as there is no major stumble in the growth trajectory you can forgot about worrying about valuations (to some degree at least) as there is such a premium put on the finite amount of names that can deliver consistent high level growth.  Of course once a company stumbles, than the valuation suddenly becomes a major issue.

Fortune has a quite in depth story on the company, and if they can expand the brand with ShopHouse Southheast Asian Kitchen.  Some excerpts.

  • It's fast food, but it still may be the most anticipated restaurant launch in town. In a modest unmarked storefront near Dupont Circle in downtown D.C., ShopHouse Southeast Asian Kitchen is finalizing the menu and training the staff. Scheduled to open within days, the innovative restaurant has tantalized both eaters and investors. The food will feature a mix of meats and fresh vegetables served in a bowl with spicy sauces and aromatic herbs. The flavors will be a blend of Thai, Vietnamese, and Malaysian. The style will be "fast casual": Customers move along a cafeteria-style line, with servers behind the counter customizing each meal. You can sit down and eat -- there's room for roughly 40 -- or take out your meal. The intriguing thing about ShopHouse, though, is it's not the startup of a fledgling, but the wholly owned experiment of Chipotle Mexican Grill Inc., already a national leader in fast-casual cuisine and No. 54 on Fortune's 2011 list of the 100 Fastest-Growing Companies. If the ShopHouse concept works, it represents an opportunity for the company to expand even beyond its current torrid pace. Bob Derrington, a managing director at Morgan Keegan, says some of his clients are asking, "Is this the birth of a billion-dollar baby?"
  • Chipotle's (CMG) growth has been remarkable. Revenue for the 12 months ending June 30 was more than $2 billion, up 23.5% from the prior year. Since 2006, revenue has nearly tripled; in the same period the number of restaurants in the chain doubled. In restaurants open at least a year, sales were up 11% in the first half of 2011. Profit margins in Chipotle restaurants have been in the 25% to 26% range -- among the highest in the fast-food industry.
  • The high margins can be explained by other efficiencies, like that its top-performing locations can move 300 customers an hour; that rate of service -- "throughput" -- is a Chipotle obsession. "Slow food, fast," the company boasts. 
  • It doesn't hurt that the average tab runs upwards of $9 -- more than a Big Mac and fries. Chipotle's margins, along with its rate of growth and its decision not to franchise, accounts for its generous market capitalization relative to other fast-food chains. Chipotle's relative value per restaurant -- $9 million or so -- is more than triple that of McDonald's.
  • While Pan-Asian isn't a wholly new idea in fast casual -- Pei Wei Asian Diner, owned by P.F. Chang's China Bistro (PFCB), has about 170 outlets, and Panda Express has more than 1,300 "quick service" locations -- the fact that ShopHouse comes from one of the big entrepreneurial players in the industry has raised hopes among investors.
  • Steve Ells, Chipotle's intense 46-year-old founder and co-CEO, sees ShopHouse as a chance to validate his business model, which is based on operational proficiency and social responsibility. "Chipotle succeeds not because of the burritos," he told me one afternoon in a ShopHouse tasting kitchen in Manhattan. "It works because of our system: fresh, local, sustainable ingredients, cooked with classic methods in an open kitchen where the customer can see everything, and served in a pleasing environment." 
  • "ShopHouse isn't yet a growth strategy," he says. "But it is a growth opportunity." The "big question," says analyst Derrington, "is whether Ells can make the same magic twice: Can Asian be as broadly appealing as Mexican?"
  • The Chipotle rules can be very specific. For example, the menu is limited to four core basics, but it offers a range of garnishes like salsa and cheese and guacamole that can produce scores of combinations. Ells serves neither dessert nor coffee. (Too complicated.) There's no dollar menu or "limited-time offers." (Too gimmicky.) And while the Dulles Airport restaurant serves scrambled eggs for breakfast, Ells has declined to begin breakfast operations elsewhere.
  • Yet despite a rigid focus, Ells's system also offers employees the chance to advance quickly. His best store managers -- who often begin in the service line and are paid near minimum wage -- can become "restaurateurs," which often means annual compensation above $100,000, including performance bonuses and stock options. (His youngest restaurateur is 23.

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