Could Chipotle and Taco Bell Both Win the Burrito Battle?
Pity Chipotle's (NYS: CMG) shareholders. It was bad enough to fend off persistent criticism of the company's sky-high valuation, but now they've got to handle David Einhorn's short-selling volleys as well. One of Einhorn's chief concerns centers on Yum! Brands' (NYS: YUM) Taco Bell and its recently launched Cantina Bell concept, which aims to raise the chain's quality perception up to Chipotle's level.
Analysts howled, and perhaps rightfully so. Has Einhorn eaten at both restaurants, or has his vast wealth insulated him from the petty taste and quality concerns of the fast-food-munching rabble? Unfortunately, we can't simply analyze consumers' perceptions of each Mexican fast-food chain so soon after the Cantina Bell launch... or can we? Thanks to the YouGov BrandIndex survey, we can:
YouGov asks respondents whether a given brand represents high or low quality, and plots the changes on a scale of negative 100 to positive 100, with 0 representing an even perception. What's surprising here is that Taco Bell's quality score, formerly below the average for all major quick-serve restaurants (the QSR label on the graph), actually surpassed the averages after Cantina Bell's launch. What's also surprising is that its perception plummeted prior to the launch.
Does this mean that Chipotle's got a burrito battle on its hands? I'm not so sure.
Chains have launched volleys at each other and lived to grow in the recent past. Take the McDonald's (NYS: MCD) McCafe ad blitz that hit American markets toward the tail end of 2008. You might have thought that the fast-food leader would undermine Starbucks' (NAS: SBUX) growth, between its American volleys and the growing global presence of branded McCafe coffee shops. Did it hurt Starbucks? Not by a long shot:
Starbucks, despite its huge post-recession rebound, is actually cheaper today on a valuation basis than it was four years ago. It's even comparatively cheaper than McDonald's, having seen a steeper P/E decline. Consumers certainly could switch from Starbucks lattes to McCafes, but they haven't, as Starbucks' performance has shown.
McDonald's still has one of the world's most valuable brands, but its customers don't go there for taste or quality reasons, according to market research. When your customers expect less to begin with, there's more room for improvement -- and that's what I'd venture to say is happening to Taco Bell's quality perception. It's good for Yum!'s bottom line, but there's no indication that Chipotle's going to suffer.
My fellow Fool Rick Munarriz has pointed out how rabid Chipotle's fan base is compared to Taco Bell's, and I have to agree. Those fans aren't going to tuck tail and run to Taco Bell just because they've added a few flourishes. And now that recent drops have pushed Chipotle's P/E well below its five-year average, the stock is a lot more appetizing than it was when I backed off from recommending it in a Foolish roundtable several months ago.
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The article Could Chipotle and Taco Bell Both Win the Burrito Battle? originally appeared on Fool.com.Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of McDonald's, Chipotle Mexican Grill, and Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, Starbucks, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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