Can Diversification Help Chipotle Mexican Grill?
According to the U.S. Patent and Trademark office website, Chipotle Mexican Grill (NYSE: CMG) has filed a trademark application for the name “Better Burger”, indicating that the company might be planning to enter the burger segment. The company has already has already launched two non-Chipotle restaurant chains (the Asian ShopHouse and Pizzeria Locale), though neither chain has many locations. That said, Chipotle believes that its model can work for a variety of food styles. Chipotle’s popularity has been impacted by the recent noro- and e coli virus scandals and company sales are off sharply as a result. Still, its “Food With Integrity” promise, paired with a combination of healthy menu items, remains attractive and, over time, diners are likely to return. Diversification into additional branded restaurant chains can only help to generate additional revenue streams, which should benefit Chipotle in the long run.
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Preferences Shifting Towards “Better Burger”
According to a 2014 report by food service industry research firm CHD, the U.S. burger market is a $73 billion business, with McDonald’s being the largest chain commanding a more than 30% market share. While burgers are extremely popular in the U.S., consumer preferences globally are shifting towards more healthier food items or “better burgers”. A survey in the U.K. revealed that 7% of consumers visiting fast food restaurants had switched from these restaurants to gourmet burger restaurants and 52% of UK consumers who had eaten or bought food from a fast food restaurant said that they would be interested in trying gourmet burgers. To tap into this trend, McDonald’s has also introduced healthy options in its menu and is experimenting with McDonald’s Next which provides a choice of salad and quinoa to its health conscious customers.
Chipotle’s reputation of being a quick service restaurant which offers “healthy” food can help the company in its venture of “better burgers”. As it suffers from declining sales after the E coli scandal and the company looks at ways to revive sales, diversification into a new product category under a different banner can prove beneficial. The burger market in the U.S. (around $75 billion) is much larger than the Mexican food business which was estimated to be around $20 billion in 2014. While Chipotle could struggle to gain a market share in this segment, the company’s focus on greater food safety and healthier fast food options should put it in an advantageous position.
We believe that, as consumers shift preferences to healthier options, Chipotle’s model should work in the burgers segment. As the company tries to revive its revenue in the wake of the food virus scandal, its focus on alternative and individually branded products should help open new revenue streams for the company.
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