Chipotle Mexican Grill’s (CMG, Financial) has been the best performing restaurant stock over the past few years; however shares are down close to 20% in 2015. The plunge was a result of Chipotle’s slower-than-expected same-store sales growth rate. I believe investors have overreacted as Chipotle’s growth story is still intact. The company has a lot of room to expand, which is why I expect it to move higher. Chipotle’s “Food with Integrity” approach has been loved by the customers, and the company expanded on this philosophy by announcing that it is removing genetically modified (GMO) products from its menu.
The company has successfully accomplished its goal of shifting to only non-GMO ingredients to make all of the food in its U.S. restaurants – together with all of the food at its Asian restaurant idea, ShopHouse Southeast Asian Kitchen. The company is now vigorously developing new improved recipes for its tortillas, which are the only food items on its menu that consist of any artificial additives. Both initiatives emphasize Chipotle’s vow to serving food made from the very finest ingredients.
Chipotle has become the first nationwide restaurant company to willingly disclose GMO ingredients in its food in March 2013, and swore at that time to shift to non-GMO ingredients for all of its food. Most of the company’s use of genetically modified ingredients was knotted to soybean oil, which it used to cook chips and taco shells, and in a variety of recipes, such as the adobo rub it uses for grilled chicken and steak, and for cooking, both on its grills and for use in sauté pans. Corn and flour tortillas also comprised some GMO ingredients.
The company suppliers embedded non-GMO corn diversities to come across Chipotle’s requirement for corn tortillas, and the company substituted soybean oil with sunflower oil to cook its chips and taco shells, and with rice bran oil for other recipes and uses. Both oils are dig out from crops for which there are no commercially available genetically modified diversities. Other GMO ingredients in tortillas were interchanged with non-GMO alternatives.
While GMO advocates point to greater costs allied with producing non-GMO foods, the company’s move to non-GMO ingredients did not result in significantly greater ingredient costs for the Chipotle, and it did not increase prices ensuing from its shift to non-GMO ingredients.
Smart marketing
Unlike its peers, Chipotle benefits from customers who promote its food on social media and by word of mouth. As explained by the company:
“Very early on, we decided to spend more on our ingredients and less on our marketing. It's always been our belief that better quality food prepared by hand and served by excellent teams would be the most powerful marketing of all. In fact, we were serving better ingredients including pasteurized dairy, local produce and meats without antibiotics or hormones long before there was even significant customer demand for such things.
Over time, this has created powerful differentiation between Chipotle and other fast-food brands. This approach has served us well and our ongoing marketing research makes us confident that this is the case. Chipotle has become quite buzzworthy with awareness coming from social media, public relations, advertising and our local and event marketing programs, but with less reliance on traditional advertising than many of our competitors.”
Conclusion
Chipotle may be look expensive, but it is worth the premium. The company already has a high profit margin and offering GMO-free food will further enhance it pricing power. In addition, it still has a lot of room to grow in the U.S. and has barely started expanding on the international front. So, I think Chipotle is a great buy on the pull back.
