Impact Of Changing Dining Preferences In The U.S. On Chipotle Mexican Grill

According to the NPD’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. Quick Service Restaurants (QSR) have been witnessing sluggish growth for the past 18 months, due to many factors such as rising commodity costs, entry of many new competitors and declining customer traffic growth. According to the report, the reason for the declining customer traffic is the widening income gap between the high-income groups and middle-class groups in the U.S. The income split is affecting the customer count in the QSRs such as McDonald’s Corporation (NYSE:MCD), Yum! Brands & Burger King (NYSE: BKW).

According to the report, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. ^[1] Fine dining restaurants have an average customer spend of $40 and QSRs report an average check of $5. A decrease in low-income customers, who prefer going to low-cost fast food restaurants, is affecting the revenue growth of the QSRs. Moreover, customer traffic in the fine dining restaurants is not enough to make up for the declining traffic count. As a result, these restaurant chains are depending on middle-class groups to fill the void.

Source: NPD report

Fast Casual Segment To Benefit the Most

As per the chart, the segment that benefits the most with the changing dining habits is the one with the average check of $10-$20, or what is called as the fast-casual segment, which includes companies such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread. This segment accounts for 16% of the total customer traffic share and has had a consistent growth in customer traffic for the past 5 years. The segment is witnessing consistent increases in its customer base, and the only segment with a greater share of customer traffic, QSRs, is facing decline in customer base.

Fast casual restaurant is a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared and high quality food than traditional QSRs, all in an upscaled and inviting ambiance. However, they also have minimum table service but the typical cost per meal ranges from $8 to $15. Fast casual restaurants most often does not have drive-thru outlets. Brands such as Chipotle Mexican Grill (NYSE:CMG), Panera Bread, Qdoba Mexican Grill and Baja Fresh are considered as the top restaurants in this category.

We have a $628 price estimate for Chipotle, which is about 5% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Has Chipotle Mexican Grill Made The Most Of It?

Chipotle Mexican Grill, which has an average check of $13-$15, has been an impressive performer over the past few years, with increase in average check and rise in customer count. With excellent revenue growth, increase in customer count and stable margins, Chipotle has established its brand in the industry. Chipotle’s shares are up 55% over the past 12 months and 37% up since the start of 2014.

• Sustained Growth In Comparable Store Sales

According to Technomic’s 2014 Top 500 chain restaurant report, sales for fast casual chains grew by 11% and store count by 8% in 2013. Although, in 2013, Chipotle generated $3.2 billion in revenues, which in comparison to McDonald’s revenues seems to be a much smaller figure, the revenue growth has been consistent at around 20% for Chipotle for 5 years now. Chipotle’s net revenues rose by a whopping 75% over the last 3 years. Chipotle’s revenue for the second quarter of the fiscal 2014 rose to $1.05 billion, up 28.6% year-over-year, primarily driven by an increase of 17.3% in the comparable restaurant sales. ^[2]

Strong comparable sales has been the highlight of the company and it believes that its extraordinary service and exceptional dining experience in addition to unique food culture hold the key for its improved comparable store sales. Additionally, the rising health concern among the people of the U.S. is one of the major reasons that fast casual restaurants are witnessing more traffic every quarter. The company’s policy of ‘food with integrity’, where it focuses on serving naturally raised meat and  fresh ingredients, have struck a chord with consumers and is forcing other restaurant chains to remodel their strategy and supply chain in order to respond to this newly created demand. As a result, people with higher disposable income are inclined more towards quality and hygienic food.

• Customers Not Dissuaded By Menu Price Hike

According to Morgan Stanley research report, Chipotle’s stores have witnessed more than a 6% increase in customer usage, the highest in the industry, over the last eight years. ^[3] Chipotle initially decided to raise its menu prices in 2013, but refrained from doing so and deferred the move to 2014. After ensuring that the QSRs have raised their prices, due to the rising commodity costs, Chipotle raised the prices of its steak burritos by 4%-6%, or 32-48 cents in the second quarter, whereas the overall menu prices went up by 6.5% on average. Many feared that the price hike would affect the company’s customer traffic, but it had minimal impact on them. ^[4] People are willing to pay 4-5% extra for hygienic and better quality food. This led to an increase in the average spend per customer visit.

The correct timing and method of price hikes, innovative new menu additions and strong marketing has helped the company in stealing market share from QSR brands. Considering the above facts, it hardly leaves any doubt that the fast casual leader has made the most of the situation and has a further growth potential.

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1. Income gap and shrinking middle class take a toll on restaurant industry [↩]
2. Chipotle Mexican Grill: earnings call transcript, Q2 2014 [↩]
3. This chart tells the whole story of how restaurant industry has changed over the past decade [↩]
4. Customers willing to pay the price [↩]