Is Catering The Next Big Thing For Chipotle?

Chipotle Mexican Grill (NYSE:CMG) announced that it will introduce catering services at its Colorado restaurants as it looks to boost sales beyond the traditional store format. The restaurant chain also said that the service will be rolled out to other markets in the coming months. With this move, Chipotle follows in the footsteps of its competitor Panera Bread, which has a successful catering business.

Chipotle’s stock had a roller coaster ride in the second half of 2012 as its results failed to enthuse investors. To drive sales, the restaurant chain is also testing a breakfast menu and contemplating opening drive-thrus.

See full analysis for Chipotle Mexican Grill

How Does It Help?

Restaurant chains are struggling to generate desired same-store sales and are coming up with new ways to increase sales. For Chipotle, the concept of catering isn’t bad if executed well. All stores have to incur expenses like labor and occupancy costs, which remain more or less constant irrespective of store sales. Catering is a pretty good way of generating incremental sales without requiring a substantial amount of capital expenditure. Moreover, since these are bulk orders (for 20 to 200 people), they could a add significant amount to the top-line if the trend catches up with general public. Bulk orders also prevent catering orders from cannibalizing the sales of its dine-in orders.

Let’s estimate how much this can add to the top-line. Assuming the catering option is eventually available at all of its restaurants nationwide, we take a conservative estimate of 1-2 orders per restaurant per day.

So let’s take 500 catering orders per restaurant annually and assume the average check per person is around $10. So, for a bulk order of 30 people, the additional revenue comes to around $150,000 per restaurant (i.e. 500*10*30). Multiply this by its 1,350 restaurants and you get a figure of about $200 million. That’s about 7% of its expected $2.8 billion revenues for 2012.

However, the importance of this service is only accentuated by the potential contribution to the profits. For its restaurants, the company’s EBITDA margins have hovered around 25% lately. That comes out to $700 million on revenues of $2.8 billion.

The cost of food, beverage and packaging is about 32-33%. For catering services, we assume it could be as high as 50% since it will involve additional expenses such as additional serving dishes, labor, etc. Therefore, half of the $200 million of expected catering revenues (i.e. $100 million) will be profits. Thus, its contribution in terms of profits will be even higher (about 15% as per our assumption).

Of course, all of this assumes that the service will be rolled out to all stores and that the model will be successful. A bill of $10 per person is on the higher side if the set up for its locations are difficult and the whole process is cumbersome and inconvenient. But, given that Chipotle is a pretty big player in the restaurant industry, we believe such issues will be sorted out by the company even if they were to come up during the initial stages.

We have a price estimate of $313 for Chipotle Mexican Grill, which is about 5% higher than the current market price.

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