Chipotle's Nothing-Burger

| About: Chipotle Mexican (CMG)

Summary

ShopHouse only has 15 locations after 5 years.

Pizzeria Locale only has 5 locations.

Management is spending money on buybacks, not ShopHouse or Pizzeria Locale expansion.

Tasty Made is being thrust in a highly saturated and hyper competitive space, and its concept seems to echo In-N-Out.

We don't see the company opening more than 5-10 Tasty Made units over the next 5 years.

Chiptole's (NYSE:CMG) plans to open a burger chain called Tasty Made seemed to get a lot of press coverage. The stock, though, hasn't really moved in response to the news, and we think that's how it should be. In our opinion, the burger expansion is a non-event that will likely materialize into a few burger restaurants doing minimal sales over the next couple years.

CMG already owns DIY pizza and Asian food chains, neither of which have had any material affect on financial performance. The DIY Southeast Asian food chain, ShopHouse Southeast Asian Kitchen, was opened by CMG in September of 2011. Nearly 5 years later, there are only 15 ShopHouse locations in the DC, LA, and Chicago metro areas. It has been a slow and rather boring rollout, and one SA contributor identified that management is putting money to work with stock buybacks but not ShopHouse unit expansion. That certainly raises some red flags, and is especially concerning considering the lack of competition in this space. Tim Wildin, the brand director for ShopHouse, has said that "no one else out there is doing Southeast Asian food and serving it the way we do". That would imply tremendous opportunity, but the company has only opened 15 units in 5 years and isn't allocating significant capital to future expansion.

The DIY pizza chain, Pizzeria Locale, is even more inconsequential in the bigger picture. After several years, the company only has 5 locations, and the difference between Pizzeria Locale and ShopHouse rollout can be contributed to competition. The CMG model has already been replicated by multiple players in the pizza space, including Pieology, Blaze Pizza, MOD Pizza, PizzaRev, and 800 Degrees. While it is a great idea that consumers are gravitating towards, the market is highly saturated and hyper competitive.

Another space in QSR that is highly saturated and hyper competitive is the gourmet burger space. It is headlined by East Coast favorite Shake Shack (NYSE:SHAK) and West Coast favorite In-N-Out, but other players throughout the country include The Habit (NASDAQ:HABT), Five Guys, and Smash Burger. Even traditional QSR giants like McDonald's (NYSE:MCD) are entering the gourmet burger space through menu revamps. The gourmet burger space is as competitive, if not more so, than the DIY pizza space.

Then there is the problem of differentiation. Many SA readers have already pointed out that Tasty Made's concept of "a limited menu featuring burgers, fries, and milkshakes" sounds a lot like In-N-Out's concept. This essentially makes the West Coast a "no-go" zone for Tasty Made, at least in its early stages. As a consequence of significant market saturation and lack of differentiation, we do not see CMG opening much more than 5-10 Tasty Made units over the next 5 years (pretty much on par with Pizzeria Locale and ShopHouse).

At the end of the day, investors need to realize that ShopHouse and Pizzeria Locale have had exceptionally slow growth. Why should we expect anything different from Tasty Made, which is being thrust into perhaps the most competitive segment in QSR? We shouldn't, and down the road, this expansion will likely be a non-event in the bigger CMG picture.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.