Can “Tasty Made” Become The Turnaround Trigger For Chipotle Mexican Grill?
Recently, Chipotle Mexican Grill (NYSE: CMG) announced plans to open a burger restaurant called “Tasty Made” this year which will exclusively focus on burgers, fresh cut French fries and milkshakes. This comes a few months after the company filed a trademark application for the name “Better Burger” which triggered rumours that Chipotle might be diversifying into the burger segment. (Read Can Diversification Help Chipotle Mexican Grill?) We believe as the company struggles to grow sales, reeling under the impact of the e coli virus which contaminated its food last year, a new line of restaurants catering to a high growth potential segment (gourmet burgers) can drive revenues for the company in the long term. While competition in this segment is intense, with large players such as McDonald’s experimenting with fresh patties and healthier burgers, a competitive edge in this market will be critical for Chipotle’s success. The company does have an edge, given that it is known for its focus on fresh ingredients and “food with integrity”. However, the burger market is more competitive than the Mexican food segment where it currently operates. Although a new restaurant can drive attention away from its food quality issues, it can also act as a distraction for Chipotle’s management, which is working on bringing the burrito business back on track.
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Chipotle’s burritos have been extremely popular and its concept of providing “healthy” fast food caught on pretty well. In contrast, the intensely competitive burger market might be a tougher one for Chipotle to crack. The company plans to continue with its policy of healthy ingredients in its new “Tasty Made” restaurant. Chipotle will focus on fresh patties and use beef from animals which are raised without antibiotics and added hormones. It also plans to use fresh made buns that are free of preservatives, dough conditioners and other artificial ingredients. This should attract a millennial population that is looking for healthier options in fast food restaurants. However competition in this market is intense. McDonald’s, which operates on a much larger scale compared to Chipotle, is working on providing healthy menu items, including a test for fresh patties. The company has also committed towards using 100% cage free eggs in its food over the next ten years. McDonalds is already seeing results, as it adapts a dual strategy of providing value based and high priced healthy meals to its consumers. Other players such as Shake Shack are also strong competitors in this sub-market, as the popularity of gourmet burgers grows.
Entering a popular market segment where strong players already exist might prove to be tough for Chipotle. The company will need significant differentiators to establish itself as a strong player in this segment. While its management is working on initiatives to bring its sales back on track after the e coli scandal, the focus on a new line of restaurants could prove to be a distraction. However, we believe that diversification can work in Chipotle’s favour and drive revenues for the company in the long term.
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