Can Taco Bell take down Chipotle?
Its Cantina Bell menu is a page out of Chipotle's playbook.
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.
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 firstname.lastname@example.org, 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.
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.
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.
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
I think that what Chipotle has going for it is that it is NOT Taco Bell...
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?
Copyright © 2014 Microsoft. All rights reserved.
VIDEO ON MSN MONEY
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.