I had to laugh when I saw the following Market Current hit Seeking Alpha Saturday morning:
That post referenced a Slate article, where the author beamed:
In many ways, the Chipotle burrito is very similar to the iPhone. Founder Steve Ells invented a way to maintain the basic speed and experience of the standard fast-food experience and make the quality of the food a little better. The better food costs a bit more money, but consumers turn out to be happy to pay a premium for a superior product.
That blurb is little more than a minefield of error and illogic.
First off, Chipotle (CMG) founder Steve Ells did not "invent" anything. That's like saying Elvis "invented" rock-n-roll. He just took something national that Mexicans in places like San Francisco's Mission District (and throughout the city) have been doing for decades. Had the Slate author done anything more than go-with-your-gut, surface-scratch research, he would have found sources from the credible to the sketchy that tell the actual story:
In 1990, Steve received his degree from the CIA. Inspired by eating at taquerias in San Francisco, he returned home to Denver in hopes of opening a similarly themed establishment that would help fund his ultimate dream of owning a "real" restaurant. So, armed with a loan from his father, he launched his first very first burrito restaurant.
CIA = Culinary Institute of America, by the way.
Ells had the means, ability and vision to take a concept, likely born in Mexico and exported to the states by immigrants, to a grand scale. I've always said CMG is a screaming buy. And I still think it's a great stock to write puts on, so I am not knocking the guy or his brand; instead, I am just saying that investors should know what they're buying. They're not buying some grand invention Ells cooked up in a Palo Alto garage, they're buying something closer to, but not necessarily like Tesla Motors (TSLA), which offers a product people with money will gobble up for reasons that only bare shaky comparisons to the dominance of Apple (AAPL).
At least the Slate author initially framed the quality of Chipotle's food as "a little bit better." However, he turned right around to call it "superior." I guess this is subjective. Is it superior to Taco Bell (YUM), for instance, on taste? Most would probably agree. But, I would take a San Francisco Mission-style burrito any day of the week over a carbon-copy Chipotle burrito. I think you would as well.
Let's consider "superior" as it relates to "quality" and something I can safely say Chipotle's target market might be concerned with, nutrition. It seems that one of the reasons you head to Chipotle is to get a relatively healthy meal. However, if you dig into the chain's nutritional information alongside that of Taco Bell and McDonald's (MCD), you discover eye-opening information.
- Throw together a chicken burrito with black beans, rice, cheese, sour cream and guacamole at Chipotle and you'll set yourself back 1,100 calories, 45.5 grams of fat (19.5 of it saturated fat, 0 trans fat with 185 mg of cholesterol) and 1,840 mg of sodium. Add some chips to the mix and tack on another 570 calories, 27 grams of fat (3.5 saturated, 0 trans with 0 cholesterol) and 420 mg of salt.
We will not even factor in a soda, which Chipotle does not include as part of its data. Its piecemeal approach to the numbers and lack of a meal-builder also make it more difficult to quickly paint a complete picture. I went for what appears to be the "worst" possible burrito selections at Taco Bell and here's how they stacked up:
And the typical meal at McDonald's:
Go with some "healthier" fare at MCD (premium classic grilled chicken, Chicken McNuggets, side salad and fruit/walnut plate) and here's how it pans out:
Of course, you can make some adjustments at Chipotle to lower some of the numbers, just as you can at Taco Bell, McDonald's and other chains. But, the Toyota (TM) Prius effect might be at play for Chipotle faithful. "I'm at a healthy restaurant, therefore I can splurge!"
Bottom line - Slate is right - sometimes - to say that quality at Chipotle is a "little better," but references to a "superior product" offset any previous logic.
Why does this comparison between Slate's contention that Chipotle is the Apple of fast-food and my back-of-the-envelope nutritional analysis matter to investors? You have to know exactly what you're buying and why you're buying it. Forget the consumer level, which, of course, matters, and focus on the investor level.
You have to give Chipotle credit, as the Slate piece does, for the process it uses to prepare some of its meat:
Chipotle stands out for some unusual process innovations as well. Their "barbecued" meat products - carnitas and barbacoa - are vacuum-packed and cooked sous-vide in Chicago before being shipped out for on-site reheating.The sous-vide cooking method is mostly associated with cutting edge haute cuisine. The way it works is that a piece of meat and its accompanying seasonings are placed in an airtight bag. The bag is then placed in an immersion circulator ... Cooking this way is slow, but extremely precise. A piece of meat held in a 155 degree water bath for long enough will cook uniformly to exactly 155 degrees worth of doneness. Sous-vide meat can then later be seared, sliced, chopped, or prepared any which way you like ... Done this way, workers with little training can produce expert and completely uniform results. Exactly what a large chain needs.
And this matters because?
It's the same assembly line meal I can get in San Francisco's Mission District, minus the unique atomosphere, reasonable prices and distinct tastes. Like the Tesla electric vehicle, a Chipotle burrito is a fad that will have a shelf-life that's likely much shorter than a McDonald's Happy Meal. As an investor, you've got to keep an extra eye on these types of investments.
Tesla will not take over the world; rather it will tap a relatively small, yet affluent portion of the population that can afford to buy its products for reasons ranging from environmentalism to social status. If you are long CMG - and I do not think you're crazy if you are - you're not bullish because of anything having to do with Apple. Or at least I hope you're not. Instead, you're riding the momo of a middle class to relatively affluent fad and seeing if Chipotle can succeed as it attempts to diversify its business to further drive hyper growth.
While the company calls it a "test concept," it will need to at least come close to repeating its success with ShopHouse Southeast Asian Kitchen:
In order to see how our model works when we use different ingredients and a different style of food, we opened ShopHouse Southeast Asian Kitchen during 2011. ShopHouse serves a menu that, like at Chipotle, is focused; main dishes consist of rice or noodle bowls or banh mi sandwiches, made with steak, chicken, meatballs made with pork and chicken, or tofu.
Notwithstanding our opening of ShopHouse Southeast Asian Kitchen and our plans to open one additional ShopHouse restaurant during 2012, our immediate focus will remain on thoughtfully growing the Chipotle brand.
If ShopHouse remains a pilot, the company will need to grow Chipotle into an international brand to justify a lofty and rapidly-increasing stock price. That's the big question, can Chipotle break borders like Apple (presently the chain only has four international locations - two in Toronto, two in London) and extend its model to other lucrative products, in this case another chain?
It's a bit like asking if Netflix (NFLX) can generate popular original programs, once and then consistently over the long haul, like HBO does. I'm not so sure. And like television viewers, restaurant goers can certainly be fickle. They'll break ranks and sever seemingly loyal ties in the blink of an eye. That's simply not the case with Apple's base.
For years now, Apple has proven that its pipeline is strong and reliable. While no guarantees exist in life, I put my money on throngs of rabid fan boys and girls lining up to buy iPhone 5 and iPad 3 just as they did iPhone 4s and iPad 3. I cannot sit here and tell you that Chipotle will do as well in China as Apple (or McDonald's) does or that Chipotle regulars will line up at ShopHouse for Asian fast-food.
I know the first objection Chipotle bulls will have to my diss of the Apple comparison. I was going to write a paragraph or two on it, however, I'd rather let it come up in the comments and address it there.
And, as an aside, the TV spot that everybody is raving about that Chipotle aired during the Grammy Awards - kind of weak and overrated.
Additional disclosure: I am long NFLX June $40 put options.