Is Chipotle Mexican Grill Starting to Cannibalize Itself?
Cannibalization is always a concern for any national restaurant or retail chain. Once new locations start to do well only by feeding off of an existing customer base, it might be the beginning sign of restaurant saturation and diminishing returns. For Chipotle Mexican Grill , it's critical that the chain is nowhere near this point as its valuation by any means suggests fantastic growth for years to come.
With over 1,600 locations, it would seem hard to imagine that Chipotle Mexican Grill still doesn't have a lot of ground to cover before it starts overlapping to the point of cannibalization. But with such immense popularity among its cult-like following, I wouldn't put it past many of their die-hards to be willing to travel a couple of extra miles until a closer restaurant opens.
But consider this...
Back in 2006, Chipotle Mexican Grill averaged $1.5 million per restaurant. Fast forward to 2011, and it was up to $2.1 million. Then it was $2.11 million for 2012. For 2013, it was $2.17 million. The trend is positive which is great, but compared to same store sales growth the overall growth rate per unit has slowed to a trickle.
Chipotle Mexican Grill had announced that same store sales for 2012 grew by 7.1%. For 2013, same store sales tacked on another 5.6%. If you combine the two and include the magic of compounded interest, same store sales over the two year period rose by 13.1%. Compare that to barely over 3% during the same period for overall average per unit growth.
Is this cannibalization or something else?
Perhaps the existing restaurants are doing great, but the newer ones aren't taking much business right away. This would seem to be the opposite of cannibalization. It may simply be a case of Chipotle Mexican Grill has already secured the most prime locations in the best markets on average and is now seeing diminishing returns from new spots.
But more likely the cult-like following takes time to build in new areas. Normally with other restaurants there is a honeymoon period where new restaurants tend to see an abnormally large amount of sales in their first three months of opening as people rush to try the new place in town before cooling off a bit to more normal levels. From there, repeat business and regulars can build.
Foolish final thoughts
As long as Chipotle Mexican Grill can continue to find new markets to put locations that are profitable, the company will thrive further. But I'd keep an eye on the per-restaurant sales figures for a sign that the hyper growth of the past may be leveling off. If, for example, the concept is only immensely popular in heavily populated urban areas, then the company's growth opportunity may be lower than you think. However, for now the number suggest there are no clear signs yet of cannibalization.
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The article Is Chipotle Mexican Grill Starting to Cannibalize Itself? originally appeared on Fool.com.Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. 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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