Can Taco Bell take down Chipotle?

Its Cantina Bell menu is a page out of Chipotle's playbook.

By InvestorPlace Mar 13, 2012 10:58AM

By Jeff Reeves

 

Chipotle Mexican Grill (CMG) is on the menu of many momentum stock investors these days. The booming burrito joint continues to post big improvements in profit and revenue -- and, most importantly, in CMG stock valuations. Chipotle stock is up almost 60% in the past 12 months, putting it up against a new 52-week high.

 

But a new offering from rival fast-food chain Taco Bell and its parent Yum Brands (YUM) could give Chipotle a run for its money.

 

A menu that admittedly is a rip-off of Chipotle's model -- featuring make-your-own burritos boasting black beans, corn salsa and cilantro rice -- is being tested in about 75 stores. And the so-called Cantina Bell offerings are blowing up, according to reports from inside Taco Bell.

 

"If it makes sense, I'd love to get Cantina Bell across the country in the second half of this year," Taco Bell Chief Executive Officer Greg Creed told BusinessWeek recently.

 

Skeptics will say that Taco Bell is the lowbrow cousin of Chipotle and wouldn't know premium Mexican food if it were slapped in the face with it. This is, after all, a fast-food joint that recently rolled out a taco featuring a crunchy nacho cheese Doritos shell, tying up $75 million in advertising and installing new machinery at four PepsiCo (PEP) plants (Pepsi owns the Doritos brand under its Frito-Lay division) just for the fad.

 

Taco Bell is also cooking up breakfast burritos in a mad dash for early-morning cash.

 

But there are reasons to think Yum may succeed in this effort, even if the other fad menu items don't do so well.

 

For starters, there are about 5,670 Taco Bell locations in the U.S. Chipotle still has fewer than 1,500. While it is growing fast, there are many areas where Yum Brands will have the market cornered if it just adds the new Cantina Bell menu to its current stores.

 

Further, Yum has the scale and distribution network to keep down rising commodity costs and to offer a competitive price. Beef prices were up more than 10% last year and could rise 5% more in 2012, so keeping margins healthy is a key part to winning the fast-food game.

 

Along the same lines, the Cantina Bell items are priced at about $4.99, significantly lower than Chipotle items that typically cost $6 to $7 per meal. That should help appeal to cash-strapped consumers.

 

I have been scratching my head over Chipotle for quite some time. In December, I was bearish on the stock at $320, and now CMG has added about 25%, double the 12% gains of the S&P 500 in the same period.

 

Oops.

 

I have been proved wrong about Chipotle's staying power, and CMG could prove me wrong again. Revenue and profits have marched up in every quarter since before 2008, proving that Chipotle has room to grow and has not run out of momentum yet.

 

Still, traders should watch the cautionary tales of other fast-growing stocks like Netflix (NFLX) after the Qwikster debacle and, more recently, Green Mountain Coffee Roasters (GMCR) this month. GMCR took a dive on news that Starbucks (SBUX) is launching a competitor to the Keurig and Green Mountain's profitable K-Cup technology. One misstep or bad news item is all it takes.

 

Investors should remember this before they pile into Chipotle at $400 a share. Even if Yum Brands and Taco Bell don't take down Chipotle, keep in mind the jaw-dropping momentum of stocks like Chipotle also works in the other direction when things go south.

 

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

 

Related links

129Comments
Mar 13, 2012 1:20PM
Mar 13, 2012 1:19PM
avatar
Back in the 1970's taco bell was actually ok fast food, they have morphed into low grade products which are good for kids budgets.......but they don't hold a candle to mexican restaurants when it comes to any type of authentic meals.
Mar 13, 2012 5:32PM
avatar

These two restaurants operate in an entirely different universe. 

 

Anyone who claims that Taco Bell can come close to Chipotle in quality of food has probably not eaten at either restaurant. 

Mar 13, 2012 1:17PM
avatar
Rick what a nice bigoted post...
Sick people like you simply need to go

And by the way No Mexican would even recognize the menu items at Taco Bell or Chipotle.

The article is not getting it, Chipotle and Taco bell are very different, Taco Bell is about CHeap and fast and pre-fab (All food is precooked before it is in the restaurant--it is only reheated there.  Chipotle is 100% fresh daily in the restaurant from high quality ingredients that are all natural.  I don't care about the 'all natural' aspect but I do know the taste is very good.

Taco Bell can put in a line of upscale items, probably sell a lot of them, but long term it is not their segment.  THey won't be drawing from Chipotle but they might expand their own customer base.
Mar 13, 2012 1:20PM
avatar
I used to live in El Paso, Texas which has many good mom and pop as well as upscale mexican places.  Chipotle's and Taco Bell's food is about as Mexican as corned beef and cabbage. (Happy St. Patrick's day!)
Mar 13, 2012 5:37PM
avatar

If Taco Bell and Chipotle aren't mexican food, what are they?  American food with mexican spices?  No matter what you call it, we eat it by the train loads, and we like it. 

 

If I have $8 or $9 to spend on a burrito and an coke, I go to Chipotle.  I don't really care what you call it, cause it tastes pretty damn good to me.  If I have a couple bucks less to spend, I will go to Taco Bell.  Not as good, but I wouldn't eat there if I didn't like it.

 

Anyone that says they wouldn't eat there because it's not "Authentic", then go to mexico and get some real mexican food, but bring your own water and toilet paper. 

Mar 13, 2012 12:39PM
avatar

if only taco bell would go back to their original menu there would be a line out the door. the last 4 times i ate there i was gagging from the stuff they are calling food  .me and all my kids do not like the fake food.                                                                                                                                                                                                  people want to eat real food

Mar 13, 2012 1:36PM
avatar
Taco Bell is the only food that looks identical going in as it does coming out. Chipotle's ingredients are a lot better than what they use at Taco Hell.
Mar 13, 2012 6:59PM
avatar
I can Say I haven't eatin Taco bell in over 2 years, everything taste like crap to me from there!!! If they think they can compete against chipotles They better put up an A game, Do I think they will be better? hell no!! Chipotle has everything made fresh not like that greasy crap you get from taco bell.. my vote goes to chipotle, all they way!!
Mar 13, 2012 1:27PM
avatar
All Taco Bell has to do is put some meat on their Tacos and Burritos. Problem Solved.
Mar 13, 2012 7:05PM
avatar
no way, taco bell is crap compared to chipotle, I hope chipotle dont shut down and I hope they open more stores
Mar 13, 2012 3:47PM
avatar

I think that what Chipotle has going for it is that it is NOT Taco Bell...

Mar 13, 2012 2:13PM
avatar
No way in hell. Chipotle is the best.
Mar 13, 2012 12:35PM
avatar
Taco Bell does not know how to make anything that isn't already packaged. I would not give their food to my dogs.
Mar 13, 2012 1:47PM
avatar
Taco Bell could NEVER compete with Chipotle!
Mar 13, 2012 1:08PM
avatar
Taco Bell & Chipotle target two different demographics. Taco Bell is for those who want a cheap "Mexican" meal. Chipotle targets customers who are food conscious and want a "Mexican" meal from a company who are trying to use unprocessed and untampered with foods. So I really do not understand why this article even exists.
Mar 13, 2012 1:43PM
avatar
I could care less. Neither comes close to real authentic Mexican food.
Mar 13, 2012 4:05PM
avatar

OK, the tomatoes at Taco Bell are just regular tomatoes, the lettuce is just regular lettuce, the beans are just regular beans, the regular cheese is just regular cheese, the tortillas are just regular tortillas and the ground beef is just regular select grade ground beef (plus the same seasonings as in the taco seasonings packet at the grocery store). The runny cheese is the same as you get on nachos at ballparks.

So I have no idea what you expect in 2 minutes for a buck or two, but that's all stuff just like you would make at home.

Of course you could use more expensive ground chuck, handmade tortillas, vine ripened tomatoes - etc. And an hour later for a few dollars more you can have a better product. I can grill better burgers than McDonald's in my sleep, but not for $2 in 2 minutes. So really, isn't this just like people saying that they only like Mercedes cars while they have a Mazda in the garage? 

Mar 13, 2012 2:20PM
avatar
Comparing apples to oranges... Chipotle actually serves edible Mexican inspired food.
Mar 13, 2012 1:10PM
avatar
Why can't Taco Bell and Chipotle co-exist?  Both are delicious, but it is really apples and oranges.  Taco bell is it's own flavor, cheap, and fast.  Chipotle is for when you are feeling more healthy, and tastes nothing like Taco bell....a little more cost, and a little slower service, but still delicious.  I don't see how these two can be in the same category.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

113
113 rated 1
279
279 rated 2
416
416 rated 3
647
647 rated 4
548
548 rated 5
513
513 rated 6
669
669 rated 7
516
516 rated 8
317
317 rated 9
113
113 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
UPLULTRA PETROLEUM Corp10
TAT&T Inc9
COPCONOCOPHILLIPS9
DVNDEVON ENERGY CORPORATION9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.