Chipotle And Pizza: Here's What's Next

| About: Chipotle Mexican (CMG)


Chipotle has lagged behind in the sector with its Pizzeria Locale concept.

Six competitors are making fast progress.

Chipotle could add $500 million in annual revenue within a few years through an acquisition.

To say that Chipotle (NYSE:CMG) has missed the boat in custom pizza, the hottest fast-casual food concept of the last year, is an understatement. It decided to wait around for three years, pondering over the idea, considering partnering with one single restaurant, in one locale, while its competitors built and launched great concepts, expanded, and franchised nationally.

If you haven't noticed, the fast-casual custom pizza concept has been exploding around the country with both private, and public companies, such as Buffalo Wild Wings (NASDAQ:BWLD) becoming involved through an investment in PizzaRev.

Chipotle got interested in the concept back in 2011, when it partnered with Pizzeria Locale in Denver, CO. At first, Pizzeria Locale was a more traditional, pleasant sit-down pizza restaurant. Chipotle came along and re-tooled it into a fast-casual restaurant with a walk-thru line of pizza ingredients. Chipotle's plan was to keep this concept and the company's involvement in it top-secret, which it did through a series of gimmicks. However, this plan had the undesirable consequence of slowing down the process.

Chipotle did manage to keep it a secret, but the purpose of the secrecy remains elusive. Only 20 employees at Chipotle and Pizzeria Locale knew about the secret partnership taking place. Because of this, the process took almost three years, and only finally launched in May 2013. On a positive note, Pizzeria Locale has been a success, and Chipotle is planning a few more locations in the Denver area for a total of three units by the end of 2014. However, it is now July 2014, and we've seen no signs of actual new locations opening, leaving Chipotle far behind its competitors.

Let's take a look at what is going on in the fast-growing "build-it-yourself" pizza segment that Chipotle could have been a part of.

First, there are privately-owned, small restaurateurs doing well. Companies, such as Pieology in southern California, are expanding at a relatively good clip. They've opened 23 stores over the last few years, some through franchises. Mod Pizza will soon have about 22 locations on the west coast only. Project Pie has 2 locations - San Diego, CA and Las Vegas, NV. PizzaRev will have close to 26 locations by 2015, mostly in California, but has already received an investment from Buffalo Wild Wings. Blaze Pizza is approaching 40 locations, and 800 Degrees is a boutique shop that has 3 locations. Pie Five, by Pizza Inn (PZZI), we see as the crown jewel of the group, with an expected 100 locations by 2015/early 2016.

Here is the chart of companies:

Concept Name


Stock Symbol

Location Count

Pie Five

Pizza Inn


40 soon, 100 in 2 years

Blaze Pizza



40 soon


Buffalo Wild Wings (minority)







800 Degrees



7 soon

Project Pie




Pizzeria Locale



3 soon

Chipotle CEO Steve Ells once said, "(Pizzeria Locale) is much different than the kinds of growth strategies you hear about from all of our competitors who talk about, oh, we're going to open up 100 restaurants or 500 restaurants. You hear these sorts of things. To me, that's not a strategy." This statement would be a bit surprising for me to hear, if I was a Chipotle shareholder. I'm of the opinion that if you are Chipotle, you need to be the biggest, fastest, and meanest competitor around. It's not about waiting around; it's about being first to market, and not just keeping pace with your competitors, but completely squashing them.

However, it might not be too late for Chipotle to move in this market. The company has the advantages of size and capital over its competitors. Chipotle has the ability to buy all the above chains in our list, with the exception of PizzaRev, with a small, even minute percentage of CMG equity. Even if each restaurant were sold, when ready, at an outrageous $2 million per unit to Chipotle, which is a sum of $344 million (172 locations), Chipotle could still pull off a major coup. It would then have a near-monopoly on the custom pizza sector throughout the United States, instead of just a few units in Denver. It could do this relatively easily financially, and if desired, even re-tool them all into Pizzeria Locales. That is a lot of power. It has the great advantage of watching the little guys make the mistakes, seeing which locations work or don't work, and possibly stepping in and paying a premium for any company in CMG stock.

Or it may focus on acquiring just the best of the group, Pie Five, which would give it a chance to keep pace with Buffalo Wild Wings. Now could be its opportunity, since Pizza Inn, the corporate entity of Pie Five, has a market cap of only $55 million even though growth prospects are so high, and franchisees are lining up in droves wanting more locations. Chipotle could easily step in and acquire PZZI for three times its current market cap, and it would only cost it $165 million, which again, is peanuts if paying in stock. $165 million is literally 1.03 percent of Chipotle's gigantic $16 billion market cap. So Chipotle could acquire the whole company using 1 percent of its share equity.

Let's take a look at the potential revenue bump as a result of such an acquisition. A quick review of Pie Five revenue shows that each location makes about $45,000 per month. You can read a full analysis of the company here. These are simple numbers, but they show that Chipotle could add $100+ million to its top line through this acquisition by 2016, and more than $500 million in annual revenue upon reaching the Pie Five potential of 1,000 stores in the United States. This doesn't even include international locations. These numbers would require that Chipotle stop franchising Pie Five from here on out, and only open corporate-owned units, funded internally.

Clearly, there is a lot of potential in the custom pizza sector. If Chipotle doesn't step it up here, somebody faster, quicker, and greedier will.

Disclosure: The author is long PZZI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Article written by Clint Harritt