Chipotle’s Catering Service Offers Growth Potential

Chipotle Mexican Grill (NYSE:CMG) foray into the catering business started with a test project in select regional markets such as Colorado in early 2013. Now the company has rolled out the service nationally, underlining management’s faith in the company’s ability to grow in an increasingly crowded U.S. market. ^[1] In the latest quarter, catering sales were already close to 1% of the sales at the restaurants at which this service is offered. ^[2] With the proportion of restaurants that offer catering set to rise, we can expect catering sales to have a positive impact on the company’s earnings in the future.

If extrapolated to all restaurants, this could mean an additional $35 million in revenues from catering, given that the company’s total revenues are likely to touch $3.3-3.4 billion in 2013. As the service gains more traction and becomes more popular, there could be a further upside to this figure. Furthermore, margins on catering services should be higher since the company does not have to incur operational expenses on these incremental revenues.

Chipotle’ third quarter performance really seems to have won over investors in the past couple of months, pushing the stock up from around the $440 mark in mid-October to nearly $540 in mid-November. The key metric driving this sudden surge – a 6.2% increase in same-store sales, seems to justify management’s belief that the company still has plenty of space to grow in the country.

We have a $416 price estimate for Chipotle, which is about 20% lower than the current market price.

The company certainly hasn’t made any significant waves in the overseas market. With only a handful of stores scattered in Europe and Canada, the company depends almost entirely on its performance in the U.S. Despite the tremendous competition it faces from players such as Yum! brands, McDonalds (NYSE:MCD) and various other ubiquitous fast-food chains, the company has managed to carve out a relatively unique niche in the market – the ‘fast casual’ restaurant.

The segment essentially offers premium-priced fast food, with an emphasis on higher quality of food and stylish interiors. In Chipotle’s case, the higher quality translates directly into better ingredients – the company sources food which is largely organic, and free of antibiotics and growth hormones.  It’s precisely because the company tries to move above a purely ‘fast-food’ image,that we think it has a chance of doing well in the U.S. as a whole, and the catering segment in particular.

Why Catering Could Work For Chipotle

Traditional, inexpensive fast-food (say, McDonald’s) is generally not considered an option for catering events. On the other hand, traditional catering services charge anything starting from the $25 mark per person for food that is considered premium-quality. Chipotle comes in with an offering that can be considered mid-way – at around $12-$13 per person, the company is offering a menu of its traditional Mexican fare (rice, beans, salsa), with the added premium value of them being ‘organically and ethically sourced.’ The pricing should work for both customers and the company – it represents around a 10%-20% extra over in-restaurant prices. Stronger pricing should be of particular importance to investors, especially in the face of declining margins due to rising food costs.

However, investors should note that all of the company’s closest competitors in the fast casual segment – Panera, Noodles, Qdoba, Potbelly and Panda Express – have also jumped on to the catering bandwagon. Of these, only Qdoba and Potbelly can be seen as serious threats as both are willing to serve large events, and are priced marginally cheaper than Chipotle. But with an impressive positioning and strong recent results to boost, Chipotle could easily feature among the winners, should the concept of catering high-end fast food take off in a big way.

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1. Chipotle’s Next Big Thing, December 2013, qsrmagazine.com [↩]
2. CMG Earnings Transcript [↩]