Qdoba's New Policy Takes Aim at Chipotle

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Chipotle's biggest competitor is turning up the heat: Qdoba -- a subsidiary of Jack in the Box -- has a radical new policy, one that appears aimed almost solely at dethroning the market leader.

Of course Chipotle has the better long-term track record, but in recent years, Jack in the Box has provided superior returns for its investors. Over the last two years, for example, Jack in the Box shares have outperformed Chipotle's by more than 25%. Much of that appreciation has been due to Qdoba -- though the namesake restaurant chain still generates the bulk of Jack in the Box's revenue and earnings, Qdoba has been responsible for virtually all of its growth.

Can that growth continue? And if so, will it come at Chipotle's expense?

No, guacamole isn't extra
Although Chipotle's customers can add most toppings to their burrito for free, the chain's policy of charging extra for guacamole is legendary -- there are even t-shirts poking fun at the concept.

Like Chipotle, Qdoba has long maintained a policy of charging extra for guacamole, but that changed earlier this month when it rolled out an updated menu. Now guacamole -- and queso, and other premium toppings that once demanded an extra charge -- are free. Qdoba has said it may raise some of its prices, slightly, to offset the change, but is largely making the move to spur increased customer loyalty.

That may work -- even if they're paying slightly more, customers might find the concept of a flat rate more enticing. Certainly, it gives Qdoba somewhat of a competitive advantage, at least in messaging -- guacamole-loving customers can head to Qdoba, confident in the fact that they won't be charged extra.

Chipotle is larger, but growing faster
The move, however, is somewhat necessary: Qdoba is playing from behind. Despite having fewer restaurants than Chipotle (632 compared to 1,673) its growth has not been as impressive: Last quarter, for example, Chipotle added 45 new restaurants, compared to just 6 for Qdoba. Chipotle's revenue grew 28.6% on an annual basis -- Qdoba's increased 14.4%.

In terms of age, Qdoba is younger, but only slightly so -- Jack in the Box acquired the company in 2003 and has been working to expand it for over a decade. To be fair, the rate of expansion could increase if the company's management is to be believed -- earlier this year, Jack in the Box set strong expectations for its Qdoba brand, arguing that it was in the early stages of a repositioning, one that could spark rapid growth. Its new free guacamole initiative appears part of that repositioning, but it may need much more to catch up to Chipotle.

Perhaps there's room for both
In October 2012, hedge fund manager David Einhorn took aim at Chipotle, citing -- among other things -- rising competition from Taco Bell. Einhorn argued that Chipotle's days of outsized growth were numbered, and that its stock was poised to fall. Since then, Chipotle shares have risen more than 100% -- Einhorn's bearish bet has proven to be a money-loser.

Jack in the Box's Qdoba is obviously a much more credible threat than Taco Bell, and its new policy, if successful, could lure some Chipotle faithful away from the chain.

But I think there's room in the market for both to succeed. Combined, Chipotle and Qdoba have less than 2,300 restaurants; McDonald's, in contrast, has more than 35,000. Yet that hasn't stopped the wide variety of competing burger chains (including Jack in the Box) from finding success. In a restaurant market that's rapidly shifting, there may be more than enough room for two major players.

Investors interested in profiting from fast casual could do well holding both.

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The article Qdoba's New Policy Takes Aim at Chipotle originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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