2014 Year In Review: Chipotle Mexican Grill

The fast casual concept has been one of the fastest growing concepts of the restaurant industry during the last decade, positioned somewhere between fast food restaurants and casual dining restaurants. They provide counter service and offer more customized, freshly prepared, and high quality food than traditional Quick Service Restaurants (QSR), all in an up-scale and inviting ambiance with meals ranging from $8 to $15. These restaurants combine the quick service of fast food restaurants with the quality of casual dining restaurants. Brands such as Chipotle Mexican Grill(NYSE:CMG), Panera Bread, Qdoba Mexican Grill, and Baja Fresh are considered  the top restaurants in this category.

Chipotle Mexican Grill (NYSE:CMG), the leader in the fast casual segment, has been delivering double digit revenue growth over the last 5 years.   Chipotle reported roughly 18% year-over-year (y-o-y) growth in revenues in 2013, whereas fast food chains McDonald’s Corporation(NYSE:MCD) and Burger King (NYSE: BKW) reported 2% and -4% annual growth in revenues. Chipotle had an impressive year in terms of financial performance, reporting increasing comparable store sales every quarter in 2014, despite the commodity inflation.

We have a $627 price estimate for Chipotle, which is about 6% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Increase In Customer Traffic Despite Price Hikes

Chipotle’s sales in all three quarters this year surged basically due to high customer traffic. However, the entire industry has been struggling with rising food costs since the start of this year. As a result, restaurants in all the industry segments passed the rising input costs on to the customers. The company’s food costs for the entire year was close to 34%, up nearly 150 basis points y-o-y. The increased food cost was primarily a result of increased prices of beef, avocados, and dairy products. As a result, in Q2, the company was forced to raise the prices of its steak burritos by 4%-6%, or 32-48 cents, whereas the overall menu prices went up by 6.5% on average and all this without hurting the customer traffic. ^[1]

According to the Bureau of Labor Statistics, U.S. consumers paid 2.6% more at eateries (food away from home) in 2013 over the previous year, while food prices were 6.2% higher at supermarkets or retail stores. ^[2] Therefore, consumers got a wide idea of price inflation for the core items and they reacted less against price hikes at restaurants. As a result, average spend per customer visit rose 5% and as the guest count was unharmed, this led to a significant increase of 15.5% in comparable restaurant sales in the second quarter. ^[3] 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. The segment that benefited the most from this scenario is the fast casual segment.

People in the U.S. are gradually changing their dining preferences and drifting towards organic food items. Moreover, Chipotle offers some unique, innovative, and delicious food items, which have grabbed people’s attention.  With commodity inflation, most of the top fast food chains have compromised on their quality of food for low costs and ease of preparation. On the other hand, Chipotle carried on its ‘food with integrity’ program and charged a fair price at the same time, without compromising on the taste and quality. Due to changing dining preferences, people drifted more towards healthier food options. As a result, during the entire year, the company witnessed an average increase of five transactions during the peak lunch hour and an increase of five transactions during the peak dinner hour. Increased transactions led to accelerated revenue growth for the company.

What Has 2015  In Store For Chipotle?

According To United Stated Department of Agriculture (USDA), meat prices will likely rise further in 2015, due to the Texas/Oklahoma drought and Porcine Epidemic Diarrhea virus (PEDv). Moreover, further disturbances in weather situations in those regions might drive up the food prices. ^[4] This could mean, in case of further inflation, we might see a price hike in menu items again in 2015. However, if the supermarket (at-home industry) witnesses a lower inflation than the food away-from home industry, the latter might witness a decline in customer traffic.

In any case, the customers continue to flock to the restaurants, and Chipotle  continues to outperform the segment, as its menu prices are already among the highest in the segment. Any further price hike, without harming the customer count, might result in an improved average ticket. If meat prices continue to rise, Chipotle’s other vegan dishes, such as Sofritas, will play an important role.  In addition, catering services offered by Chipotle are expected to flourish in the next year as well.  In short, Chipotle still has a huge potential for growth and will continue to dominate the segment in the next few years.

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1. Customers willing to pay the price [↩]
2. Eateries to lift prices to catch food-at-home inflation [↩]
3. Chipotle raises prices, www.businessweek.com))

   According to the NPD’s foodservice market research, 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. ((Income gap and shrinking middle class take a toll on restaurant industry [↩]

4. Food Price outlook 2014-15 [↩]