Another Day, Another Failed 2nd Restaurant Chain for Chipotle

Another Day, Another Failed 2nd Restaurant Chain for Chipotle

On April 24, Chipotle Mexican Grill (NYSE: CMG) announced financial results for the first quarter of 2024, and investors absolutely loved it. And to be sure, it was a great quarter. But the quarterly financial report overshadowed an update regarding a new restaurant chain the company was cooking up: Chipotle is abandoning the Farmesa concept that it launched last year.

Farmesa isn’t the first failed restaurant concept from Chipotle. It follows a growing list of previous attempts. Here’s why it (kind of) matters for investors.

Another failed attempt for Chipotle

In February 2023, Chipotle announced a new restaurant chain called Farmesa, offering customizable bowls, not unlike Sweetgreen. However, Restaurant Business reports that Farmesa is now closed. And to investors, CEO Brian Niccol recently said, “It’s not part of our growth strategy right now.”

It’s not like Chipotle is hurting without Farmesa. The company’s revenue and earnings per share (EPS) in the first quarter were at all-time highs. This has sent its stock to an all-time high as well.

However, it’s more than just the headline numbers. Chipotle’s restaurant financials are world-class, showing that it’s a top operator. In theory, management could apply this premier skill set to multiple restaurant concepts and greatly grow its market opportunity, presenting much higher upside potential to investors.

As co-founder Steve Ells said in 2011: “I have always believed that the Chipotle model would work well with a variety of different cuisines. Chipotle’s success is not necessarily about burritos and tacos, but rather about serving great, sustainably raised food that is delicious, affordable, and convenient.”

But for some reason, the plans to expand by applying the “Chipotle model” to other kinds of food just isn’t working. Here’s a list of what hasn’t worked so far:

• ShopHouse Southeast Asian Kitchen specialized in Thai and Vietnamese food. It closed all 15 locations in 2017.
• Tasty Made was an attempt at the traditional fast-food menu, selling hamburgers, fries, and milkshakes. Its only location closed in 2018.
• Pizzeria Locale excited investors because fast-casual pizza was seen as a no-brainer idea. Chipotle closed the last five locations in 2023.
• Farmesa opened in 2023 and closed in 2024.

In the first quarter, Chipotle had 3,479 locations, which on average generated more than $3 million each in sales annually at a restaurant-level operating margin of nearly 28%. Restaurant operators who can achieve these kind of financials should open as many restaurants as possible. A second concept could have helped the company in this regard.

Chipotle doesn’t even need a second chain to be as big as its core chain. Replicating these numbers with only a few hundred locations would be a big deal. But once again, the company is down to just one restaurant brand.

The good news

Supposing Chipotle could develop, own, and operate more than one restaurant chain, its long-term market opportunity would be much bigger for investors. That said, the ongoing opportunity with its core brand is still large, and it’s larger than what it was projecting just a few years ago.

For example, billionaire Bill Ackman took a large stake in Chipotle nearly a decade ago, saying that the restaurant chain could reach 5,000 locations someday. Many investors thought this projection was irrationally high. But Niccol is aiming even higher than this now.

In recent talks, he has stated his goal of growing Chipotle to 7,000 locations. Moreover, management wants the chain’s financials to continue improving as well. It believes its locations can reach average annual sales volume of $4 million, which might support even higher profit margins.

As Niccol said, “We’ve got so much opportunity in front of us just with what we can do with the brand Chipotle that internally, we’re not working on [a second concept].”

In conclusion, it would be really good for shareholders if it could develop multiple restaurant concepts. But at least it still can deliver growth for its investors by further building out the Chipotle concept.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends Sweetgreen. The Motley Fool has a disclosure policy.