12/4/2012 6:45 PM ET|
Burrito battle: Taco Bell vs. Chipotle
The success of upscale offerings from a celebrity chef has Taco Bell eating into the upstart's business. That's showing up in stock prices as once-hot Chipotle faces tough times.
To most people, burritos are just a tasty lunch treat.
But to a couple of lunchtime giants, burritos are the weapon of choice in a fierce fast-food battle.
The battle broke out last summer when Taco Bell, a division of Yum Brands (YUM), rolled out its new Cantina Bell menu.
Developed by celebrity chef Lorena Garcia, of Bravo's Top Chef Masters fame, the Cantina menu features a premium burrito with black beans, cilantro rice and marinated chicken or beef for under $5, plus new sides like corn salsa. (Search for details on Cantina Bell menus on Bing.)
Based on recent company numbers, Taco Bell clearly scored a win with these upscale offerings. And it's no wonder. They are an unabashed imitation of the extremely popular offerings of Chipotle Mexican Grill (CMG), known for upscale burritos packed with fresh ingredients and hormone-free meat.
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Yum Brands executives have no problem admitting they borrowed a key insight from Chipotle -- that customers will pay more for better quality, fast-casual Mexican food. "That's what Taco Bell can deliver, and at two-thirds the price of our fast-casual competitors," CEO David Novak said on a recent earnings call.
Now, this victory is probably not the only reason Yum's stock is up 5% since July 1, despite a drop last week, while Chipotle shares -- once hotter than jalapeños -- have fallen some 30%. But in the fiercely competitive world of fast food, consumer buzz is critical. And Taco Bell has it right now.
Chipotle's problem: A 'resurgent' Taco Bell
Many analysts -- and Chipotle itself -- maintain Taco Bell's new burritos are no threat to Chipotle, because their customers are so different. The customers who buy Chipotle's burritos, at $7 or so each, typically make more money. They appreciate Chipotle's ambience and careful sourcing of fresh ingredients, as a lifestyle choice.
Theoretically, at least, this is supposed to prevent them from crossing over to Taco Bell, with its more downscale, run-for-the-border, midnight-munchie reputation. There's also a been there, done that issue with Taco Bell, which can trace its history to 1946 (it went public in 1970); Chipotle got started in 1993 and is still fresh to many people, as it's still rolling out lots stores each year to new regions."We don't see Taco Bell as being a threat at all," Chipotle spokesman Chris Arnold told The Wall Street Journal in early October. "There's a lot more to what we do than grilled chicken and corn salsa, and we believe customers see the difference."
But legendary hedge fund manager David Einhorn disagrees. Einhorn, of course, is well known for highly successful negative bets against Green Mountain Coffee Roasters (GMCR) and Lehman Brothers before each tanked. At a New York City investor conference on Oct. 2, the Greenlight Capital hedge fund manager laid out his case against Chipotle, which he's had negative bets against this year.
The bottom line: A "resurgent" Taco Bell endangers once-hot Chipotle.
Einhorn says a survey his hedge fund conducted found that Chipotle and Taco Bell customers actually don't see much difference between the two chains. And his survey found that 75% of Chipotle customers go to Taco Bell. "Taco Bell has started to eat Chipotle's lunch," he said at the conference. "Less long exposure to Chipotle stock is a good idea."
Though fast-food experts -- and Chipotle -- dismissed Einhorn at the time, his case suddenly seemed to make a lot more sense on Oct. 19, when Chipotle announced a slowdown in sales that tanked its stock.
On the earnings call, Chipotle managers denied the slowdown had anything to do with Taco Bell.
"There was a lot of noise during the quarter about somebody taking market share away from us," said co-CEO Montgomery Moran. "We're not seeing any kind of loss whatsoever in our transactions moving from us to any other competitor."
But I think Chipotle and the analysts may be wrong, and that Einhorn is on to something. Here's why.
Driving diners loco
First, Chipotle's explanation that a weak economy caused its sales slowdown doesn't ring true, since the economy was weak a year ago when Chipotle growth was going gangbusters.
But more important, consider some interesting results from a survey of fast-food diners conducted by Goldman Sachs in late September -- almost three months after Taco Bell's new Cantina Bell burritos were launched.
The survey found that Chipotle's "brand equity" score among consumers fell sharply to 65.8 from 70.4. Meanwhile, Taco Bell's score rose to 64.8 from 62.1.
Two other insights stand out. One is that Chipotle's score fell "meaningfully" across all demographics. This seems to confirm Einhorn's findings that well-heeled customers who are supposedly loyal to Chipotle may have no problem defecting.
Second, Taco Bell is clearly on a roll in coming out with innovative dishes that customers love. Its brand-equity score was a lowly 58 a year ago. (All fast-food joints score in a range of 53 to 71.)
Taco Bell came out with a big hit in March -- it's Doritos Locos Tacos, which have shells made of Nacho Cheese Doritos. The chain sold an astonishing 100 million of these tacos in the first 10 weeks. And now the new Cantina Bell menu is obviously a hit. Taco Bell sales at stores open more than a year grew by 7% in the third quarter. In contrast, Chipotle's growth was 4.8%.
None of this proves Chipotle customers have turned to Taco Bell. But the ratings changes in the Goldman Sachs survey coincide with a sharp decline in growth at Chipotle and an increase in growth at Taco Bell, suggesting that something like this is going on.
Plus Goldman Sachs says Taco Bell's growth was driven by an increase in traffic, and not just increased spending and visits by regulars. "Taco Bell is now attracting more new customers than either Chipotle or Qdoba, its primary Mexican peers," concluded Goldman Sachs analyst Michael Kelter. The number of people saying they've eaten at Taco Bell rose sharply this year, while it declined at Chipotle, the survey found.
Taco Bell's 2012 success is part of a larger trend. Over the past five years, Taco Bell customer satisfaction has jumped sharply, according to American Customer Satisfaction Index surveys. "Their improvement over the last five years is the biggest in the industry," says ACSI director David VanAmburg. "It's pretty impressive."
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Second, comparing Chipotle to Taco Bell is like comparing Subway to Panera. It's two completely different qualities of food.
Freebirds trumps Chipotle, it has a better selection and grat atmosphere.
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