The restaurant segment is broadly classified into fast food restaurant (also termed as Quick Service Restaurant), casual dining restaurant and the fast casual restaurant. The fast casual restaurant is basically the hybrid of the casual dining restaurant and the fast food restaurant. The restaurant sales have been constantly growing with the rebound of economy and the total restaurant sale is expected to reach a record high of $683.4 billion in 2014. With this the growth momentum of the restaurant industries continues for the fifth consecutive year and is anticipated to grow further.
Various restaurants in all segments are persistently experimenting with the marketing plans, food menu, and pricing, franchising model opportunities, with an objective of growth. Chipotle (CMG, Financial) is one such fast casual restaurant that is also on the same wavelength of promotional strategies with an objective of increasing its footprints and deeper penetration of the market. Let us first discus its performance in the second quarter of the fiscal 2014, and then we continue to discuss about the new strategies of the company to leverage growth.
Quarter overview
The second quarter results for fiscal 2014 reveals that the company recorded a surge in top and bottom lines. The revenue was up by 26.6% year over year, to record $1.05 billion as compared to $0.82 billion in the same terms last year. Net income increased by 25.5% year over year, to record $110.3 million as compared to $87.89 million for the second quarter in 2013. Although the operating margin declined by 30 basis points to record 27.3%.
The growth in the revenue which leveraged the bottom line was mainly due to the increase of 17.3% in comparable restaurants sales. The company started 45 new restaurants which also added on to the revenue growth in the quarter. The total count of restaurant chain now records 1,681 outlets spread globally. The increased price of the food inventories like beef, dairy products and avocados led to increase of food cost up by 150 basis points; food cost was 36% of the revenue and was partially offset by increased price of the menu.
Plans to build tiny restaurant
The company now plans to have a new business model with a smaller restaurant, where it anticipates acquiring a larger bite of the restaurant market. The start smaller restaurant will have a limited seating arrangement. As the brand of the company is already established, the size of the seating arrangement should not hurt the sale of the smaller outlets.
These smaller restaurants would certainly benefit the growth of the company if we consider the following facts.
- Smaller restaurants mean low asset or infrastructure cost; that means less operating expense and higher margins.
- Deeper penetration in the market, as more outlets can be opened in distributed locations, which are easily approachable for walk-in customers.
- Very successful in the region where real estate prices have been skyrocketing and opening restaurant with limited seats can be more affordable to start.
- The inventory burden on the smaller restaurant can also be less as compared to the big restaurant and the logistics of inventory can be certainly favorable over the larger restaurants.
The company is already looking around for various locations in U.S., U.K. and France to set up the new restaurant with limited seating arrangements. The company feels that the need of the customer has been constantly changing so it can always revise it seating arrangement and experiment with the limited seats restaurants.
Conclusion
The company recorded an excellent quarter for top and bottom line. Comparable stores sales and average storage sales growth is also a good sign for the company. The company is always focused on its price and food menu to provide maximum to its customers. The global expansion plans of the company will further strengthen its grip on the restaurant market segments especially in the fast casual restaurant. The expansion plans will be certainly benefited with its new concept of tiny restaurant which can be easily established spreading the foot print of Chipotle. I think, investors can always grab chipotle, if they are looking to invest in restaurant segment company that can provide long term returns.
