The phrase “nothing lasts forever” aptly describes the rise and fall of Chipotle Mexican Grill, Inc. (NYSE:CMG). CMG was a classic growth story until 2015 when everything seemed to conspire against its recent and wild success. New restaurants kept opening, comparable sales growth kept inching upward and it seemed the good times would continue.
Then several food safety issues (including three E. Coli outbreaks) put the brakes on. After intensive efforts to regain the trust of the public and ensure safety, CMG was struck again by Norovirus earlier this year, sending shares spiraling downward.
My thoughts on this, though, are that CMG weathers this just fine and is able to revert to its historical performance. Now, this is not to understate the seriousness of food safety, but CMG management has been razor-focused on this issue for years now. These outbreaks can weigh heavily in the public mind for some time, but are by no means insurmountable.
Meet Pizzeria Locale
The Shophouse Asian concept fizzled out without ever having contributed meaningfully to Chipotle’s business. CMG management was obviously behind the idea and wanted to grow it into essentially the Asian version of Chipotle, with mixed noodles in lieu of burritos. When that didn’t quite pan out the way they had hoped, management’s answer was not to give up on adjacent food concepts. Instead, they decided to invest in Pizzeria Locale — fast casual applied to pizza.
The idea of applying the model that made the burrito business so successful to another internally built brand is exciting. Viral outbreaks aside, CMG is a master of creating supply chains for fresh food — and the same processes that make Chipotle work, should make pizza work.
With Shophouse, it seemed the story wasn’t quite there, which mattered to consumers. The financial results weren’t there either, which mattered to management. But with pizza, a story isn’t really necessary. All that’s important is exceptional pizza. People don’t need to be sold on a great pie.
CMG also just ventured into Tasty Made, a hamburger concept, and opened one restaurant. Management knows that to get Wall Street back on its side, it’s going to need more than just another few hundred Chipotle restaurants. It’s going to take another food concept that takes off with the same trajectory as Chipotle when it first started out.
CMG’s Secret Sauce
In keeping with the tenets that made Chipotle hugely successful, CMG has entered into a joint venture with Denver entrepreneurs (with the option to eventually have a majority stake) in Pizzeria Locale.
It’s the same Chipotle model applied to pizza. You order your pizza in line. It’s made right before your very eyes as you make your way through the queue. The pizza is cooked to perfection in a couple minutes time. Fast, fresh, and low cost. As I understand it, the wait time is longer than for a burrito, but is reasonable.
Where the Pizzeria Locale experience differs from Chipotle is on the beverage side, where alcohol is available. Anyone in the restaurant industry knows that the fattest margins come from the beverage side, average check sizes will be bigger and restaurants should be at least as profitable as a normal Chipotle location.
If this starts getting traction, it would be a game-changer for CMG. Pizzeria Locale could be the fire that Chipotle needs. And the best part is that, at current valuations, you’re not paying up for the option value.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.