Will Taco Bell & Supply Chain Issues Bite Into Chipotle’s Growth Story?

by Trefis Team
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After the successful introduction of the Doritos Locos Tacos line-up last year, Taco Bell is set to expand the menu by debuting the Fiery Doritos Locos Tacos. Can the restaurant chain’s latest attack on the Mexican food fare play a spoilsport to Chipotle Mexican Grill’s (NYSE:CMG) operations? Since last year, Taco Bell has been expanding its menu to directly take on Chipotle.

While it is true that the two restaurant chains are positioned differently, there is overlap between the diners of Taco Bell and Chipotle. While Taco Bell targets budget conscious people such as college students and those with midnight munchies, Chipotle aims to attract people looking to upgrade from the regular fast food chains. The latter claims to offer better quality ingredients while not charging significantly higher at the same time.

See full analysis for Chipotle Mexican Grill

But Taco Bell has been trying to go upscale for a while now. Last year, it introduced the Cantina Bell menu created with the help of celebrity chef Lorena Garcia, which was a pretty big success. Not only did it affect Chipotle’s sales but also forced the management to postpone menu price hikes. Taco Bell has an advantage in terms of pricing. The burrito as well as the Cantina Bowl, both part of the Cantina Bell menu, sell for ~$5 compared to $8-9 at Chipotle.

One of the reasons why Chipotle’s comparable sales declined in 2012 was because of increased competition from Taco Bell. Not only did it steal some of Chipotle’s customers but also eroded some of the company’s pricing. Shares tumbled to $240 last year but have now recovered to more than $400 after two to thee quarters of improved performance.

More Worry?

Furthermore, Taco Bell is also testing the waffle tacos which will see the restaurant chain eventually expand its breakfast menu to about 6,000 restaurants by 2014. Chipotle is not into breakfast presently but the management admitted last year that the company could foray into this segment in some time if sales start to saturate.

Mature restaurant chains usually resort to expanding the daily hours or introducing premium products in order to boost restaurant sales. For smaller restaurant chains, the strategy is to target untapped markets while optimizing the sales of the existing ones. Chipotle is likely to be categorized within the latter. But here in lies another problem.

Reportedly, Chipotle might consider using beef treated with antibiotics since it was facing difficulties to secure enough supply. [1] Chipotle has been adding a significant number of restaurants every year with plans to add about 180 in 2013. But difficulty in achieving to secure the desired supply chain could swallow its expansion plans.

Although only a tiny fraction of its restaurants may end up using non-naturally raised meat, Chipotle would lose the ‘higher moral ground’ it boasts of, something that separates the chain from the rest. The segment of customers who are more finicky about the ingredients may stereotype Chipotle as just another fast food chain in case the restaurant decides to go ahead with the decision to use meat containing antibiotics.

We have a $394 price estimate for Chipotle, which is roughly in line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Chipotle considering change to allow antibiotics, August 18, 2013, wcnc.com []
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