Chipotle's Expansion Plans Could Be Swallowed Up By Rising Food Costs

ChipotleWhile Chipotle's (CMG) fresh, nutritious Mexican fare has many fans in the U.S., the company has also been consistently adding new restaurants and is looking at further expanding in Europe. It reported impressive first quarter numbers driven by a 12.4% increase in comparable restaurant sales, and opened 12 new restaurants bringing its total store count to 1,095. However, increasing food and commodity costs could affect Chipotle margins and discourage the food chain from opening new restaurants until the costs pressures settle down -- a situation affecting other restaurant chains like McDonald's (MCD), Burger King, Yum Brands! (YUM) and Papa John's (PZZA) as well.

While we estimate the total number of Chipotle restaurants will increase to 1,800 by the end of our forecast period, Trefis members expect the restaurant count to reach 2,100 – implying an upside of above 15% to our price estimate for CMG stock.

Our price estimate of $273 for Chipotle's stock is roughly in line with the market price.

Distinguishing Menu Attracts More Customers

Chipotle's Mexican menu is a welcome change for fast food consumers accustomed to the usual burgers and pizzas. Despite being slightly pricier compared to McDonald's, Chipotle's fresh and nutritious tacos and burritos attract many customers and are popular among certain segments like university students.

The firm's revenue for the first quarter increased by 24% year-over-year to $509 million, driven by higher comparable store sales resulting from increased store traffic. (See Comparable Store Sales Surge Drives Chipotle's Q1.) The number of Chipotle restaurants is still on the lower side at around 1,095 compared to McDonald's, which has 11,000 franchises and close to 2,000 company operated restaurants in the U.S. This implies tremendous scope for Chipotle to expand.

... But Cost Pressures Could Take a Toll

The average spend per customer at a Chipotle restaurant is around $11, compared to less than $4 for McDonald's. This clearly indicates that Chipotle's Mexican fare is way more expensive than burgers and sandwiches served at McDonald's. On top of this, rising inflation is eating into the margins of food companies, and Chipotle is no exception. It reported restaurant level operating margin of 25.2% during the last quarter, a decrease of 90 basis points over the prior year period.

Increasing food prices could result in lower visitor count or decrease in average spend per customer visit, and this could eventually dampen the company's plan of opening 135-145 new restaurants by the end of 2011.

Our complete analysis for Chipotle's stock is here.

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well well alway have a bigger problem not get better why is grovement not do any good to american people alway blame on people problem money no is wrong my point people who goot layoff hard to budget money is hurt them do not use that reason layoff is make a lot crazy going on just everyone on this earth !!thank make god bless you all.

June 15 2011 at 2:14 PM Report abuse rate up rate down Reply

Looks like they are having the same trouble that Quizno's had. Expensive food in a recession. Are they buying their food and supplies from Chipotle like Quiznos? Smashburger which can be traced back to Quizno's owner, from what I read on the internet, also will hacve trouble because they are buying food from their own company, and have a high average check in a recession also. McDonald's does not sell food to the operators. They find the best quality and the cheapest price, which is why they are able to maintain a profit is these economic times.

June 13 2011 at 8:04 PM Report abuse rate up rate down Reply

Was this article written by two different people? First you write Chipotle is "slight more expensive" than McDonald's, then you say the average Chipotle tab for one person is $11 and for McD's is far. On what planet is almost 3 times as much "slightly more expensive"?

June 13 2011 at 5:04 PM Report abuse rate up rate down Reply

retarded expansion plans should not be seen solely as attributed to food expenses but their reliance upon illegal workers. My family has long been in the health care business. Many illegals are infecting these places, hacking and wheezing with virulent and contagious late symptomatic TB and HepC etc. And where do you think the current blight of bed bugs comes from? They jumped the border hitched to the illegals. Liberals enjoy your "diversity" and "inclusiveness" in pathogens and infestations.

June 13 2011 at 3:50 PM Report abuse +1 rate up rate down Reply
2 replies to bc3353's comment

Chipotles is facing worse problems than rising food prices after they were found to have been hiring illegals. Nothing like someone who may have hepatitis handling your food - as what happened at a Houston Pappasitos in 2007.

June 13 2011 at 6:07 PM Report abuse rate up rate down Reply

You forgot to blame Global Warming, low test scores and the state of the economy on them. Not everything is their fault. I hear a little predjudice here.

June 15 2011 at 10:27 AM Report abuse rate up rate down Reply

I'm proud to say that I've never eaten in or ordered a dish with a name that contains the word "chipotle."
Not sure how so many people lived without it for so long.

June 13 2011 at 3:33 PM Report abuse rate up rate down Reply

Although Chipotle does have some downsides, I know some people who work at Chipotle, the employees are not treated as well as they should be and often work vary hard for little. Some new workers get paid more than people who have been working there a long time, just does not sound very fair to me. Managers are not paid hourly so they sometimes take advantage and do not do the work they are supposed to and come in when they feel like it; they are the ones bringing the place down not training new crew members correctly and giving people raises or more money when they do not deserve it. I do like that their products are local it helps the communities in the area and the animals are treated more humanly than those from other fast food restraunts. I am willing to spend more for what I believe is better quality. I also like that you can see the food that you are getting and that it is a clean environment, at other places you do not really know what you are getting, how clean it is, etc. Chipotle is obviously not an everyday thing, but everything in moderation i say!

June 13 2011 at 3:18 PM Report abuse +1 rate up rate down Reply

Chipotle is beginning to lay off construction managers and such. I know a few people who worked for them in that department who had told me they were overbuilding and going way over budget/cutting corners. Then about a month later they were all out of a job despite Chipotle planning to open up several more resturaunts.

June 13 2011 at 2:55 PM Report abuse rate up rate down Reply

Chipotle burritos are huge and filling well worth the couple extra dollars a person has to spend and the nutritious side to them cant be beat. I would pay the extra dollars and eat there over McDonalds any day. I just wouldn't be able to do it as often.

June 13 2011 at 2:48 PM Report abuse rate up rate down Reply

Seems like a risky investment if the price estimates are around market price and they are having cost concerns. Their prices are at the top of what you can charge for casual fast food, so they will need to absorb increases or come up with alternative menu items. They also have loabor problems, being accused of hiring illegal aliens.

June 13 2011 at 2:26 PM Report abuse rate up rate down Reply

i thought they were going to say the (big) problem is fire coming out your ass

June 13 2011 at 2:18 PM Report abuse +4 rate up rate down Reply