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Chipotle and Yum! Brands Are Solid Long-Term Investments

June 25, 2014 | About:
kcpl

kcpl

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When it comes to food and beverages, some of the foremost names that come to our mind are Chipotle Mexican Grill (CMG) and Yum! Brands (YUM). And this is no surprise as these companies have made a reputation for themselves over the years in the minds of consumers. They have expanded their network considerably and their stores can be seen throughout the world. Moreover, with changing tastes and preferences of the consumers, they have also experimented with their menu. The company has also put in lot of effort on the marketing front to increase sales.

As the network grows, so do the problems related to it. Price hike of various ingredients is a matter of concern for the entire food and beverages industry. The decline in beef production has caused prices to soar. And this increase in price has in turn affected sales; Chipotle and Taco bell have reported a decline in beef sales. In addition, rising prices also impact the company’s margin, which again is a matter of concern for management. As a result of the declining production, out-of-stock displays have become common for Chipotle.

A close look at Chipotle

In terms of numbers, Chipotle Mexican Grill has become one of the fastest growing restaurant chains in the U.S. According to statistics, it has achieved more than $3 billion in annual sales with around 1,500 restaurant chains spread across various locations. Chipotle has established itself as a major name in the restaurant industry in the past 20 years and has redefined the fast food concept. The company claims that its fresh ingredients are free from antibiotic, which provides it an edge over its peers.

The stock price of Chipotle has increased more than 600% in the past five years. However, the company is concerned with declining margins. Its margins have declined around 1.05% due to which the stock has become expensive.

Along with beef, salsa ingredients, dairy, and poultry products have also joined the fleet, with an increase in their prices. In addition to this, rising costs in marketing along with cut throat competition has put further pressure on Chipotle’s margins.

As already discussed, Chipotle has been experimenting with its menu. Consequently, it has converted its pinto beans menu into a strict vegetarian one by eliminating pork from it. This is a strategic move as it will increase its margins as even with a vegetarian menu, it charging the same price. Along with this, it has strengthened its portfolio by adding La Combe, which will serve coffee brewed from organic beans.

It has been estimated that coffee is one of the most popular beverages around the world with an annual consumption of 400 billion cups. This shows the massive potential of the coffee market, which can be tapped by Chipotle.

A look at Yum!

Chipotle has to face tough competition from its peers such as Yum! Brands. The company has three brands under its hood namely KFC, Taco Bell, and Pizza Hutt. Taco Bell has also altered it menu offerings and is going a step further by joining hands with Lorena Garcia to develop items such as Cantina Burrito bowl and Cantina Burrito.

In such a highly competitive market, price is a decisive factor. Taco Bell offers Burritos for $5, which is around $1.50 less than similar servings by Chipotle. But, management at Chipotle is not ready to lower its price, in fact it believes that it has loyal customers, who will not be lured by petty discounts such as these and will return to it because of their fine experience with Chipotle.

Yum! is focusing on emerging markets such as China. Management believes that China is one of the biggest overseas markets with around 3,800 KFC restaurants. However, KFC’s sales have declined around 13% since the start of the year, which is mainly on account of the bird flu panic. But the company had some relief from Pizza Hut, which has offset the decline in sales at KFC.

Conclusion

Both Chipotle and Yum trade in the same industry and hence face the same challenges of price hike, which has been affecting their margins. But the management at both the companies is trying their level best to increase its margins, and this makes them solid investments.


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