It’s no secret that consumer tastes are constantly shifting, and if restaurants want to not only maintain but grow their customer bases, it is essential to keep up with what customers want.
One of the biggest shifts in consumer tastes in recent years has been plant-based foods. For a variety of reasons, ranging from health concerns to ethics and even sustainability, more people are looking to add more plant-based foods to their diets. It’s estimated that the market for meat substitutes in the U.S. will grow to $17.5 billion by 2027.
In order to keep up with this shift, fast-food chains are adding their own plant-based protein options so that they won’t lose customers to their competitors. For example, Wendy’s (WEN, Financial) has its black bean burger, Burger King is testing plant-based Impossible Nuggets and McDonald’s (MCD, Financial) recently announced a collaboration with Beyond Meat (BYND, Financial) to offer the McPlant Burger.
However, when we consider what most customers are actually looking for in plant-based options, it becomes clear that most plant-based offerings are aimed toward catering to a trend rather than a dietary choice. In fact, the fast-food industry in general shows very little ability or desire to cater to dietary choices, with one notable exception – Chipotle Mexican Grill Inc. (CMG, Financial).
A unique business model
Even before it began offering its vegan protein option Sofritas, Chipotle has always been unique among fast-food restaurant chains in that it offered customers a unique level of customization to their meals, allowing them to order a meal that was technically vegan even if they couldn’t have a direct meat substitute.
This unique business model, where customers can build their own meals out of food options that Chipotle fully discloses the ingredients lists for, has been highly attractive for all customers with dietary restrictions, not just those who want to eat more plant-based foods. For example, those who are allergic to wheat can easily avoid tortillas and wheat-containing sauces, while those who don’t eat pork can be sure that their rice wasn’t cooked with lard.
It’s notoriously difficult to stick to specific dietary choices or avoid allergens in restaurants, so for many customers, Chipotle is one of the few fast-food options they can rely on in order to avoid accidentally eating something they don’t want to eat.
This business model tapped into an enormous unaddressed consumer trend in the U.S., and that’s why Chipotle is growing so quickly today. Other fast-food restaurants are trying to get in on the plant-based and cleaner-eating trends, but their ability to effectively market to these trends is extremely limited due to the way they operate and their approach to business in general.
The fast-food industry’s limits
Unlike Chipotle, the majority of the fast-food industry is limited in its ability to adapt to new dietary trends by the way it prepares food. The majority of food items are usually prepared at warehouses before being frozen and shipped out to individual restaurants.
Whether the meals are cooked or simply heated up on site, it doesn’t change the fact there’s nothing the individual locations can do to change the ingredients of their menu items. If something isn’t vegan, there’s no way to make it vegan. If something has gluten, there’s no way to take the gluten out. All employees can tell customers is “sorry, we don’t have anything you can eat.”
With restaurants that operate like this, decisions to change the ingredients in menu items are all made at the top level of the company. This can make them rather inflexible in the face of the growing number of customers that want to know what they’re eating or avoid specific ingredients. Top management is only concerned with what they think the majority of customers will like, not with catering to individuals.
This weakness was put on clear display in 2001, when McDonald’s was hit with a class-action lawsuit from Hindu customers who were unwittingly duped into consuming animal products from the fast-food chain, which is against their religion.
McDonald’s had claimed previously that it switched from using lard in its fries to using vegetable oil, which customers understandably took to mean that the company was no longer using animal products in its fries. However, when some customers complained that the vegetable oil fries weren’t as tasty, they began adding natural beef flavor to their potatoes, which, in many customers’ minds, entirely defeated the purpose of switching the fry oil in the first place.
It’s turning out to be a similar situation with the plant-based meat substitutes in fast-food chains. A so-called “vegan burger” might include mayonnaise or have animal-based ingredients in the bun. Once again, even as it tries to cater to changing consumer trends, the fast-food industry is missing the driving factors behind these trends, which can harm the trust between them and customers.
Chipotle’s growth
When it comes to evidence that Chipotle’s offerings are consistent with changing consumer trends, we need look no further than the company’s astounding growth, both in terms of earnings growth an in terms of stock price growth.
Chipotle has a three-year revenue per share growth rate of 10.4% and a three-year earnings per share without non-recurring items growth rate of 26.6%. The top and bottom lines faltered in 2016, when the company’s attempts to offer healthier foods backfired with an outbreak of food poisoning; most other fast-food options are too soaked in preservatives for this to happen so easily. However, the company has recovered remarkably since then, renewing its focus on employee training and food safety standards in order to continue safely offering heathier options.
The company’s fast growth, combined with management’s ambitious goal of doubling its restaurant footprint in the U.S., has led investors to bid up the stock to insane earnings multiples compared to the rest of the industry. Investors currently assign the stock a price-earnings ratio of 89.91 compared to the industry median of 26.31. Even the GuruFocus Value chart, which takes future growth estimates and historical earnings multiples into consideration, rates the stock as significantly overvalued.
If Chipotle really can double its U.S. store count in a reasonably quick timeframe, keeping to similar growth rates as what it’s been posting, then investors will likely continue assigning the stock higher valuation multiples as well. CEO Brian Niccol seems confident the opportunity is there, especially with nearly 16,000 restaurants having closed down since the beginning of the pandemic, decreasing competition for high-quality restaurant sites.
Chipotle’s top guru shareholder, Bill Ackman (Trades, Portfolio), also sees other growth opportunities for the company. Back in 2017, Ackman pushed for more drive-throughs, which Chipotle has implemented to great success. The company also built up a popular order online, pick up in store model even before the pandemic, which has helped it shift to fulfilling more online orders.
According to Ackman, Chipotle could also benefit from opening for breakfast and adding a breakfast menu, as well as expanding overseas. Chipotle seems determined not to deviate from the menu that has brought it so much success, though; after more than 20 years in business, the company has only added one permanent new menu item, Sofritas, though it has occasionally tested other items throughout its locations, including brisket and cauliflower rice.
Conclusion
When it comes to keeping up with the clean eating, plant-based and other dietary choice shifts in the U.S., competitors can’t keep up with Chipotle. Even as the likes of McDonald’s are attempting to offer plant-based options, they are often catering only to a very limited group of trend-followers rather than the entire plant-based community, an oversight that Chipotle is far less guilty of.
The key to fast growth is to cater to unmet demand. For many of Chipotle’s customers, a real competitor has yet to emerge. Compare this to other fast-food names like Wendy’s, McDonald’s and Burger King; even as these chains attempt to add plant-based offerings, it will likely only be more things along the lines of meat substitutes that might actually still have meat products added, depending on what they put in the fixings. That’s not innovation so much as an attempt to avoid losing customers to the tide of changing tastes.
