Chipotle Mexican Grill’s assembly-line business model of slinging burritos and carnitas had a banner day on Wall Street. As the much of the market saw increased volatility Friday, Chipotle saw record highs, boosted by much better-than-expected earnings.
Much of the company’s solid growth came from its ability to quickly serve long lines of hungry customers during peak rush hours, a concept known as throughput, said Stephen Anderson, a restaurant analyst with Miller Tabak & Co. The efficiency at which customers move through Chipotle lines during busy hours seems to be increasing, he said.
What separates Chipotle from peers?
Over the last five years, Chipotle’s stock has surged an incredible 1,030% as the company has become one of the largest restaurants by market capitalization in the market. The reasons for its success during this period are plentiful, but they can be traced back to three core explanations.
1. Chipotle was one of the first fast-casual restaurants and really formed the business model for the segment, which is growing three to five times faster than any other segment in the restaurant industry in any given quarter.
2. Product Innovation: Chipotle continues to add new foods to its menu, and it has successfully grown beyond Mexican food into Asian food. It is now bringing its fast-casual business model to the pizza industry. Thus, Chipotle’s growth has never been an issue.
3. Organic and healthy focus: Many thought healthy consumption was a fad, but it has proven to be a long-term lifestyle that Chipotle’s peers are now racing to satisfy. Chipotle saw this trend coming, and it has positioned its menus to meet this need.
Fast Casual Versus Fast Food
One trend that you might want to take notice of is the shift from quick-service (fast food) and casual dining restaurants to fast casual restaurants.
For proof, consider a recent quote from Bonnie Briggs, an NPD restaurant industry analyst:
“Overall, restaurant customers are trading down, foregoing some of their visits to full service places while increasing the number of visits made to fast casual restaurants. Fast casual concepts are capturing market traffic share by meeting consumers’ expectations, while midscale and casual dining places continue to lose share.”
Fast casual vs. fast food
Fast food is the same thing as quick-service. The name has been changed to “quick-service restaurants” due to the negative connotation associated with the phrase “fast food.”
According to the NPD Group (a global information company), the foodservice industry still hasn’t recovered from the recession. Still, the fast casual dining space has performed well. In 2013, fast casual restaurant visits increased 8% versus 2012. If that’s not impressive enough, spending at fast casual restaurants jumped 10% over 2012. Comparatively, total spending at all restaurants improved just 2%.
The reason for the superior performance has to do with better service than fast food restaurants and more affordability than casual dining restaurants. Food served at fast casual restaurants is believed to be fresher than what you find at fast food restaurants.
The chart below shows the difference between fast food foot traffic and fast casual foot traffic since 2009 — all numbers are year over year:
|Year||Fast Food Traffic||Fast Casual Traffic|
|2009||Down 3%||Up 4%|
|2010||Down 1%||Up 6%|
|2012||Up 1%||Up 9%|
As you can see, the fast casual space is growing at a decent clip. Also, keep in mind that the average check size is higher at fast casual restaurants than at fast food restaurants: $7.40 vs. $5.30. The average check at full-service restaurants is $13.66, but that doesn’t mean much without increased traffic.
Part of the reason for growth in the fast casual space is increased unit growth. For instance, fast casual units grew 6% to 16,215 in 2013. This might make the numbers above seem skewed, but only restaurants that are bullish about their futures will add more locations. Restaurant chains that are struggling will close locations to free up cash flow to pay off debt or reinvest that capital into better-performing locations.
Panera Bread and Chipotle Mexican Grill are the top performers in the space, but is one a better option than the other?