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Why Did Sequoia And Bill Ackman Buy Chipotle (Ticker: CMG)?

|Includes: Chipotle Mexican Grill, Inc. (CMG), MCD

My thesis is simple: "franchising"

Note: I am using approximate numbers. Please verify them on your own and always do your own due diligence.

-Chipotle has 2,000 stores, all owned by the company

-Each store makes about $2mn in revenue annually on average

-These stores, if sold, should sell for 1.5-2.5x P/S (using MCD's franchise stores)

-Each store on average should sell at ~$4 mn. They have 2,000 stores. In other words, total $8 bn income by franchising out stores

By the way,

1. CMG will open more stores

2. CMG could get 10%+ royalty income from franchisees

3. CMG has food safety system, while competing mexican food restaurants might not.

=> lattice work of mental model: food business is sticky, since you remember the food you had when you were younger (you can't crave the taste you never experienced) and our mouth is a personal space; don't want much change.

=>Besides, why would you go to CMG's competitor if you don't know if they have a food safety program while CMG has one and all the incentive in the world to make their food safe)

4. CMG's trading at $12 bn mkt cap.

5. MCD has 36,000+ stores worldwide. CMG has 2,000.

Few more things...

-CMG sells responsibly raised food. Win-win business for the company and consumers.

-Risk: they might have difficulty expanding fast as they try to recruit people that fit their culture.

Risk: they need to acquire more organic food as they expand in the US and globally.

-CEO Ells is a great manager, entrepreneur and chef but is not a fan of franchising because he wants to control the quality of the food and his restaurants. With good training, I think incentive of franchisees would be aligned, and shareholders will benefit as well. Let's not underestimate the power of incentives as Charlie Munger suggests. The question should be "how can I franchise while preserving quality?" and not "how can I make CMG great without franchising?"

-Sequoia and Bill Ackman can push CMG in this direction. It would be helpful to estimate if franchising would speed up store expansion.

-Franchising does not need to happen immediately and can happen once they open many more restaurants, but it is reasonable to give them credit for the potential. At current price, it seems like a classic "heads I win, tails I don't lose much" situation.

Disclosure: I am/we are long CMG.