The next big food battle won't be about McDonald's (NYSE:MCD), Popeyes, or Pizza Hut trying to sell chicken wings. The next battle will be fought over fresh pizzas that bake up in minutes. The hottest new concept in pizza appears to be from the fast casual dining segment, where customers can build their own craft pizzas, which are baked in less than three minutes. Recently two of the hottest restaurants companies, Chipotle Mexican Grill (NYSE:CMG) and Buffalo Wild Wings (NASDAQ:BWLD) announced each invested in budding craft pizza companies. Both companies have experienced high growth in the past year, and both companies are looking for the next brand to propel further growth.
CHIPOTLE TESTS TWO NEW RESTAURANT CONCEPTS
Chipotle pioneered the assembly line concept for fast casual dining using fresh ingredients, and in doing so created a $16.8 billion empire built on burritos. While there is still plenty of room for the Chipotle brand to grow in both the U.S. and abroad, for the company to sustain the growth that investors have come to expect, it needed to expand its concept to other cuisines.
Expanding beyond burritos and tacos fit well with the company's business model, as it was in essence developing more than just one brand, but a fast casual business concept that could be used to develop a number of different brands. Tim Wildin, Chipotle's concept development director pointed out that Chipotle was successful not because of its Mexican food, but because its business model was based on the "use of sustainable ingredients that take hours to prepare but seconds to serve."
Chipotle founder and CEO Steve Ells commented on the business model. "We happen to be very good at burritos and tacos, but the reason we're good at burritos and tacos is that we're really the best in the world at this new fast food format."
The company's first expansion, in testing its model with other concepts, was in 2011 when it opened ShopHouse Southeast Asian Kitchen, a fast casual Southeast Asian inspired restaurant. To date ShopHouse, which the company sees as one of the top long-term growth drivers, now has six locations split between the east and the west coast, with expansion plans in the future.
The second concept Chipotle is testing is pizza. The company invested in the idea of a small Denver fast casual pizzeria, Pizzeria Locale that can serve a fresh piping hot pizza in less than two minutes. Pizzeria Locale offers around 10 classic pizzas, and customers can choose various ingredients in the interactive service line. And because of the intense heat of the oven and the lighter style of the dough the pie is fully baked in 90 seconds. Just like the Chipotle brand, it's all done at the counter level and with fresh ingredients. Mr. Ells explained, "Opening Pizzeria Locale using a model similar to Chipotle allows us to make extraordinary pizza, made with high-quality ingredients accessible to everyone."
Chipotle launched Pizzeria Locale in Denver last May with restaurateurs Bobby Stuckey and Lachlan Mackinnon-Patterson. The company is also exploring options for two more stores in the city, though the company stressed that it intends to grow Pizzeria Locale slowly. Mr. Ells, along with his Chipotle team, were intimately involved in the business plan, the real estate strategies, and the design and development of the Chipotle-style pizzeria. Mr. Ells was also instrumental in keeping the prices low and getting rid of table service, opting for the assembly line counter. At this time Mr. Stuckey, Mr. Mackinnon-Patterson, who are the majority shareholders, will run the restaurant, but Chipotle's contract gives the company an option to become the majority shareholder if Pizzeria Locale grows into a large chain.
Mr. Ells commented that even though they have already started scouting spaces for a second and third location, they were not in a rush for further expansion. I believe the Chipotle concept will work for both Asian cuisine and for pizzas. I do believe if the restaurants do well expansion will come quicker than hinted. Chipotle has the financial might and the experience to bring both concepts nationwide, and while it's essential to get the process down correctly before a nationwide expansion, once demand starts there is little to slow it down.
For investors concerned that Mr. Ells might be spreading his wings a bit too thin, he did clearly state his focus will stay on the Chipotle brand when he commented. "While both Pizzeria Locale and ShopHouse are exciting concepts, it's important to remember that our growth will continue to be driven for the foreseeable future by expanding the Chipotle brand within the U.S."
Chipotle stock has risen over 75% YTY and is selling at a premium, closing on Jan. 13th at $529.80, less than 5% off its 52-week high. The company still experiences revenue growth in the double digits. In its third quarter Chipotle's sales rose 18% to $826.9 million with comparable-store sales growth of 6.2%. Its diluted EPS increased by 17.2% to $2.66 per share.
The Chipotle brand has been a winner, and investors have been well rewarded. While many of the once popular casual dining chains have fallen on hard times as customers pull tighter on their purse strings, Chipotle's fast casual concept has flourished. I think it makes sense for the company to keep its focus on expanding Chipotle while building its next successful brand. And if either of the two new concepts is successful Chipotle should see double-digit growth for a number of years to come.
BUFFALO WILD WINGS - WINGS AND PIZZA
Coming off a stunning trouncing of MCD after the burger giant's failed attempt to dethrone Buffalo Wild Wings as the chicken wing sales leader, Buffalo Wild Wings has set its sights on conquering the pizza business by investing in a small but growing Southern California pizza chain, PizzaRev. Looking more like the Chipotle concept than the Buffalo Wild Wings concept, PizzaRev affords customers the ability to build their own custom pizzas from a variety of sauces, cheeses, and toppings displayed in front of them, all for under $10. And like the Chipotle pizza concept the PizzaRev's pizza bakes quickly, three minutes in a 900-degree oven, making PizzaRev a fast casual restaurant. It also gives Buffalo Wild Wings entrance into the fastest growing segment of the restaurant business, the fast casual dining market.
Buffalo Wild Wings' CEO Sally Smith, commented that the goal for the company is to have a second vehicle of growth, and that the company is looking for, "another concept or two to their fleet of stores." The company also was very careful in the type of concept it was interested in investing. There were certain criteria that had to be met. The company was not looking for mid-sized chains or turnaround opportunities, but was examining both casual dining and fast-casual concepts that lend itself to franchising and nationwide growth potential.
Kathy Benning, Buffalo Wild Wings' executive vice president of global marketing, brand and business development, pointed out the reason the company chose PizzaRev as its next concept was that, "along with chicken wings, pizza is one of America's most popular foods and we believe that PizzaRev has great potential for continued growth and success."
Buffalo Wild Wings has had an excellent run, up over 90% YTY. The stock closed on Jan. 13th at $142.03, hovering within 10% of its all-time high of $152.53. Last week Morgan Stanley downgraded the stock to an "Underweight" from "Overweight" due to the recent gains along with its slowing expansion, and placed a $143 price target on the stock.
Buffalo Wild Wings, however continues to see solid growth. The company saw third quarter revenue increase 27% to $315.8 million. Net earnings increased 66.9% to $17.9 million from $10.7 million, and earnings per diluted share increased 65.4% to $0.95 from $0.57. The company currently has almost 1,000 locations and plans on expanding to 1,700 in the United States and Canada within the next 10 years, while venturing into international expansion of Buffalo Wild Wings restaurants around the world. However, Dave Donnan, lead partner in global management consulting firm A.T. Kearney pointed out that Buffalo Wild Wings' biggest challenge in growing globally will be marketing to cultures that aren't as fanatical about football as America.
My take on Buffalo Wild Wings is if one likes chicken wings, beer and sports, it is a great venue. While at first glance it appears the company soundly beat MCD in selling chicken wings, I think MCD actually beat itself through poor preparation, poor advertising and pricing its wings at casual dining prices as opposed to fast food prices. And MCD is still sitting on millions of pounds of frozen chicken wings that they have to get rid of. If MCD lowers its prices on the wings and focuses on a proper advertising campaign it might just cut into Buffalo Wild Wings' sales post football season.
Which brings me to my concern - pricing. Buffalo Wild Wings' big draw is for sports, mostly football, and once football season ends I question whether the crowds will spend their hard earned dollars as often. A group of four could easily spend close to $100 in wings, drinks, tax and tip. As football season ends, Buffalo Wild Wings will find it once again competing against other casual dining restaurants for customers. And these consumers will be more interested in value for their dollar as opposed to a place to watch the game. And unless the company continues to open more restaurants I see its revenue dropping in the coming months - until the next football season. That is why I believe for Buffalo Wild Wings to continue its growth it is essential to have a second brand that is in the fast casual market.
I like both Chipotle and Buffalo Wild Wings, and that each is looking to expand its concepts and brands, and if both companies are successful both should continue to see their companies and stock grow. However, I see Chipotle having the advantage in both size and expertise. The company has proven it can develop a successful nationwide fast casual concept. I also like that Chipotle is not relying primarily on sports to attract its customer base, but a broader audience looking for fast and fresh food.