Another day, another failed second restaurant chain for Chipotle

On April 24 Chipotle Mexican Grill (NYSE: CMG) announced financial results for the first quarter of 2024, and investors went crazy about it. And let’s be honest, it was a great quarter. But the quarterly financial report overshadowed an update on a new restaurant chain the company dreamed of: Chipotle is abandoning the Farmesa concept it launched last year.

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

Another failed attempt for Chipotle

In February 2023, Chipotle announced a new restaurant chain called Farmesa, offering customizable bowls similar to Sweet green. However, Restaurant Business reports that Farmesa has 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) reached record highs in the first quarter. This has also taken the stock to a record high.

However, it is about more than just headlines. Chipotle’s restaurant financials are world-class, demonstrating that it is a top operator. In theory, management could apply these top skills to multiple restaurant concepts and significantly expand the market opportunity, giving investors much greater upside potential.

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

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

• ShopHouse Southeast Asian Cuisine specializes in Thai and Vietnamese dishes. It closed all 15 locations in 2017.

• Lekker Made was an attempt at the traditional fast food menu, with burgers, fries and milkshakes. The only location closed in 2018.

• Pizzeria Locale excited investors because fast-casual pizza was seen as a no-brainer idea. Chipotle closed its last five locations in 2023.

• Farmesa opened in 2023 and closed in 2024.

In the first quarter, Chipotle had 3,479 locations, generating average annual revenue of more than $3 million with a restaurant-level operating margin of nearly 28%. Restaurant operators who can achieve these types of financial results should open as many restaurants as possible. A second concept could have helped the company with this.

The story continues

Chipotle doesn’t even need a second chain to be as big as the core chain. It would be a big problem to replicate these numbers with just a few hundred locations. But then again, the company only needs one restaurant brand.

The good news

Suppose Chipotle could develop, own and operate more than one restaurant chain, then the long-term market opportunity would be much greater for investors. That said, the continued opportunities with its core brand are still strong, and greater than what it predicted just a few years ago.

For example, billionaire Bill Ackman took a major stake in Chipotle nearly a decade ago and said the restaurant chain could one day reach 5,000 locations. Many investors found this projection irrationally high. But Niccol is now aiming even further than this.

In recent conversations, he has expressed his goal of expanding Chipotle to 7,000 locations. Moreover, management wants the chain’s financial situation to improve further. The company believes its locations can reach an average annual sales volume of $4 million, which could support even higher profit margins.

As Niccol said, “We have so much opportunity in front of us just with what we can do with the Chipotle brand that we’re not working on internally. (a second draft).”

In conclusion, it would be very good for the shareholders if they could develop several restaurant concepts. But at least it can still deliver growth for its investors by expanding on the Chipotle concept.

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

Another Day, Another Failed 2nd Restaurant Chain for Chipotle was originally published by The Motley Fool