CMG - Chipotle

[JayGatsby]

a few weeks ago was chipotle perfectly priced?

My guess is it was either cheaper than it should have been or more expensive, but only time will tell.

 

Personally I think they have a lot more growth ahead of them even if they wiff completely on international. I've never seen people get so generally excited for a restaurant for such a long period of time, much less a restaurant with 2,000 locations.

[gjangal]

it can do 15% rev growth for some time still. plus operating leverage at existing stores . Imo this still has a decent runway. 1900 restaurants in the U.S. is not a lot. As mentioned in the posts above, international growth is still very new

[DCG]

Starting to look interesting to me. The eColi issues will pass. Stock isn't yet cheap by any means, but getting more attractive.

[orthopa]

Starting to look interesting to me. The eColi issues will pass. Stock isn't yet cheap by any means, but getting more attractive.

 

I agree, have always thought it was expensive but its trading at the same forward multiple as V which I think is a tad expensive but a great business.  This may eventually be a situation of getting a fair price of a great business, all assumptions have to be that growth continues.

[johnny]

The eColi issues will pass.

 

Pun deliberate?

 

I'm still short, and happy to see the stock decline, but it does seem like a typical over-reaction to this kind of news. I haven't heard much chatter about this in ~real life~ and that is really the only way this has a substantial long term impact on the brand.

 

Their shophouse stores in LA continue to perform very well. That remains, I think, their best growth prospect and it is what I would suggest anybody in the stock monitor very closely.

 

 

[grandmasterG]

just a reply on the potential of international expansion: I've been to Chipotle in London already four or five times, and it was never as crowded as in the US, no long lines

I don't know if they can be successful in Europe, but at the moment Chipotle is clearly not as popular, word of mouth is not spreading, so I wonder if it would be wise to think they can do 500 or 1000 locations over time in Europe

for the next five years investors should probably focus on the expansion potential of shophouse and pizza: can anybody give me an idea of how popular these are, and if so, why?

 

 

a Berskshire/fairfax/chipotle fan from Belgium

[JayGatsby]

The biggest question to me is what is the saturation point in the US? Their plans are to add ~225 stores this year, which will put them at ~2,100. This is ~1/7th the size of McD in the US and McD is arguably in a more competitive niche. They've probably hit their best locations already so $500K of EBITDA per new store probably isn't realistic forever.

 

[Palantir]

Do Chinese people like mexican food?

[Spekulatius]

Do Chinese people like mexican food?

 

Generally not. (My in laws are Chinese).

[ccplz]

I'm Chinese and I love Chipotle. All my friends (East Asians) do too.

 

Then again, we're in our early-late 20s.

 

[johnny]

Do Chinese people like mexican food?

 

Do Chinese people like mexican food?

 

Since I, earlier, made a big short case for why I don't think AmMex food has the same potential elsewhere as it does in America, I'll provide a bit of a counterclaim:

 

A lot of Chinese people I think either like Mexican food or could develop a taste for it. But I think that is the wrong question to ask. Chipotle doesn't succeed because it is the only provider of Mexican food, but because it provided the right values/brand association (all natural, humanely raised gmo-free yoga practicing cows) at a sweet spot price point (menu prices in the single digit dollars, but pushing average checks tolerably over $10) at the right time in the right context.

 

To the extent that there IS a winner of "Mexican" food in China, it will be the business that adapts the Mexican concept to Chinese needs, even if that means something other or more than manipulating the recipes to suit their tastes. In other words, targeting a different price point, a different dine-in experience, pushing different brand associations. This could be Chipotle, but when you go to any of their existing international locations, you see nothing but an attempt to carbon-copy US stores as closely as possible (but of course with notable failures, since they don't have the US supply chain).

[Max Alpha]

There is a rapidly growing privately owned premium fast food Mexican chain in Australia called Guzman y Gomez.

 

Obviously this is a far smaller market, but they are basically Australia's answer to Chipotle and have grown from a $5m AUD revenue startup in 2010 to a $100m+ AUD per year company today.

 

Mexican food was on the radar in Australia but wasn't very popular. There weren't really any successful national fast food options that had permeated the mainstream.

 

https://www.guzmanygomez.com/

 

I've never been to Chipotle but this basically seems to be Australia's equivalent, relatively fresh ingredients, slightly higher price point than your typical fast food e.g. McDonalds but still affordable, friendly staff, nicer stores than your traditional fast food options. They appear to be carving a market out of Australia's main fast food franchises, Mcdonalds, KFC, Hungry Jacks (Australia's Burger King), Subway etc.

 

 

[innerscorecard]

I have been to literally every Mexican restaurant in Shanghai. There are a few. They seem to be doing quite well. But Shanghai isn't China - and all the restaurants are in places where there are at least some foreign (mostly Western) clientele.

 

Based on my personal experience, although technically Mexican food should adhere to Chinese tastes (it has rice, for example), it does not have much of the intangible appeal of Western food to Chinese people. National prestige matters, as does general familiarity. Even in Shanghai, for every Mexican restaurant, there are dozens of French, Italian or Spanish restaurants. And they have a lot more Chinese clientele. It's exciting to eat that for Chinese people.

 

From my personal experience visiting many second and third tier cities in China, I think the TAM in mainland China for Chipotle is quite limited, absent a big paradigm shift such as what allowed Yum Brands to prosper so much in China. Maybe that can happen.

 

And let's not even talk about organic or sustainably sourced ingredients. Even sourcing safe, properly prepared ingredients is itself a massive undertaking and challenge in mainland China, especially at scale. Hell, there are restaurants in Shanghai with the name "Green & Safe." Literally not being poisonous is already a differentiating factor. The Chinese eater is decades away from caring about sustainability or organic food, save a few weird hipsters.

[Spekulatius]

I'm Chinese and I love Chipotle. All my friends (East Asians) do too.

 

Then again, we're in our early-late 20s.

 

My wife and I like Mexican food too, but the older generation and many first generation imigrants don't like it, based on my experience.  I think Chipotle is at best OK Mexican food though, many locals Retsaurants are much better in Population centers with large Hispanic populace. If you are living in a place with little Hispanic population and hence limtited Mexicans food choices, it may be the best you can get.

[johnny]

Based on my personal experience, although technically Mexican food should adhere to Chinese tastes (it has rice, for example), it does not have much of the intangible appeal of Western food to Chinese people. National prestige matters, as does general familiarity. Even in Shanghai, for every Mexican restaurant, there are dozens

 

I think the rice thing is actually a disadvantage. To some extent, I think it makes a comparison to local (affordable) cuisine much easier.

 

How much does zongzi cost right now in Shanghai? That's probably the first thing I'd be comparing to if I was taking the tinfoil wrapper off of my first 100RMB Chipotle burrito.

[berkshire101]

Does anyone have a rough estimate of market saturation for the Chipotle concept in the US?  Like how many restaurants before same-store-sales start to slowdown?

 

In the US:

- McDonald's has more than 14,300 restaurants.

- Taco Bell has more than 5,900 restaurants.

- Pizza Hut has more than 7,800 restaurants.

- KFC has more than 4,300 restaurants.

- Panera Bread has more than 1,800 restaurants.

- Chick-fil-A has more than 1,900 restaurants.

 

I've read numbers like 3,500 to 4,000 before Chipotle reaches market saturation.  With the ShopHouse and Pizzeria Locale, that might get bump to 5,000 to 6,000 stores in the US.

[awindenberger]

Does anyone have a rough estimate of market saturation for the Chipotle concept in the US?  Like how many restaurants before same-store-sales start to slowdown?

 

In the US:

- McDonald's has more than 14,300 restaurants.

- Taco Bell has more than 5,900 restaurants.

- Pizza Hut has more than 7,800 restaurants.

- KFC has more than 4,300 restaurants.

- Panera Bread has more than 1,800 restaurants.

- Chick-fil-A has more than 1,900 restaurants.

 

I've read numbers like 3,500 to 4,000 before Chipotle reaches market saturation.  With the ShopHouse and Pizzeria Locale, that might get bump to 5,000 to 6,000 stores in the US.

 

I personally think they could do a lot more than that just in Chipotle stores, but it would involve creating smaller stores that have a lower build cost, and lower expected annual revenue. For example, I think that our small town of 10k would have no issues supporting a Chipotle, but it certainly wouldn't deliver $2.5mil in revenue a year.

[valueinvestor82]

I couldn't believe that this thread was created on a value investing board originally. My comment early this summer reflected that. Scott Hall said this back in July as the stock rocketed through $700 toward $760: "I don't own shares, but have you ever done the numbers on the sort of returns on its capital Chipotle earns from opening a new restaurant? When you run the numbers, it's good enough that the high P/E looks like it could be perfectly reasonable."

 

It's good that you didn't own the stock, Scott. And maybe this is a buying opportunity (I still won't touch it). But as value investors, we have to pay a sufficient discount to allow the unpredictable To have a smaller probability of totally ruining our outcome. Paying $700/share in the face of an outrageous P/E that only prices in perfection is what leads to ruin. I'm not picking on you, but your comment was made with perfect timing to make a point after the initial drop.

[berkshire101]

Does anyone have a rough estimate of market saturation for the Chipotle concept in the US?  Like how many restaurants before same-store-sales start to slowdown?

 

In the US:

- McDonald's has more than 14,300 restaurants.

- Taco Bell has more than 5,900 restaurants.

- Pizza Hut has more than 7,800 restaurants.

- KFC has more than 4,300 restaurants.

- Panera Bread has more than 1,800 restaurants.

- Chick-fil-A has more than 1,900 restaurants.

 

I've read numbers like 3,500 to 4,000 before Chipotle reaches market saturation.  With the ShopHouse and Pizzeria Locale, that might get bump to 5,000 to 6,000 stores in the US.

 

I personally think they could do a lot more than that just in Chipotle stores, but it would involve creating smaller stores that have a lower build cost, and lower expected annual revenue. For example, I think that our small town of 10k would have no issues supporting a Chipotle, but it certainly wouldn't deliver $2.5mil in revenue a year.

 

Maybe management will go that route when they're done picking the lower hanging fruits.  Starbucks has a lot more stores, but revenue per store is like half that of a Chipotle. 

[rkbabang]

Anyone looking at Chipotle now?  I think these recent problems will likely be temporary ones.  Does anyone think these issues are systemic problems due to lack of management of its supply chain or some other unfixable reason? My thinking is if that were the case then they would have ran into these issues much sooner.

[johnny]

Well I've covered my short, so I guess I'm kind of a buyer.

 

I think there's a great deal of industry schadenfreude at play here, and agree with you that this is probably the massive business model problem that some commentators are implying.

 

I also do not have a high enough opinion of the intelligence of the average QSR customer to think that this will permanently destroy Chipotle's branding as a "healthier" food option, even though it is complete garbage.

 

That said, it is still not a bargain priced stock, so I'm not sure why you'd want to risk it.

 

FWIW, their Shophouse concepts in LA seem to be doing very well. This is a big reason why I covered.

[TwoCitiesCapital]

Anyone looking at Chipotle now?  I think these recent problems will likely be temporary ones.  Does anyone think these issues are systemic problems due to lack of management of its supply chain or some other unfixable reason? My thinking is if that were the case then they would have ran into these issues much sooner.

 

I've been watching it. I still eat there despite the news and it's generally really, really crowded every time I go in.

 

I see this as a reasonable price, but am waiting for a "cheap" price since I believe that U.S. equity markets have an elevated probability of experience a major leg down in 2016/2017.

[krazeenyc]

Anyone looking at Chipotle now?  I think these recent problems will likely be temporary ones.  Does anyone think these issues are systemic problems due to lack of management of its supply chain or some other unfixable reason? My thinking is if that were the case then they would have ran into these issues much sooner.

 

I've been watching it. I still eat there despite the news and it's generally really, really crowded every time I go in.

 

I see this as a reasonable price, but am waiting for a "cheap" price since I believe that U.S. equity markets have an elevated probability of experience a major leg down in 2016/2017.

 

I'd get interested around 15x 2015 earnings. So $225.

[JayGatsby]

Was as crowded today as I've ever seen it. A lot of the perception of "healthier" isn't just from the local/GMO-free/natural argument that probably has weak science behind it, but more from being able to pick your ingredients. While the fully loaded burrito with tortilla probably isn't great for you, a salad with veggies, beans, chicken and a reasonable amount of sauces/toppings is different.

 

It's about as scientific as being GMO free, but I just compare Chipotle's store count to other chains and think they have a long way to go.

[BG2008]

I'm surprised that no one has mentioned this amazing Bloomberg article regarding Chipotle

 

http://www.bloomberg.com/features/2015-chipotle-food-safety-crisis/

 

I was disappointed, but not surprised to learn, that most of the meat came from industrial prep centers.  The issue with Chipotle's brand is that it has this warm fuzzy non-industrial message, at least from a sourcing and farming perspective. At first, I was surprised that the crisis happens in regions rather than individual restaurants.  Now this all makes sense.

 

If a specific store made all the meals, it is likely that the crisis can be traced back to a specific store.  I was puzzled by why there were regionally closings rather than individual stores.  Given that some of the meat is braised at regional prep centers, this makes a lot more sense.  As the crisis continues to linger, the "sausage making" aspect of Chipotle's food prep will be unfolded.  Even though the company may source locally and use organic meats etc, people will likely be turned off that there are giant industrial pots making their Carnitas. 

 

I always thought that buying CMG puts that's 30% OTM and holding it as a hedge was a good idea.  CMG fits all the mold of a high flier that wakes up one day to problems and crash and burns.