$3 for Guac, $1,500 for a share – Chipotle | Summer Series

Bryce: [00:00:22] Welcome to the Equity Mates Summer Series proudly brought to you by Sharesies. Over 12 episodes, we're deep diving into some of the most exciting, interesting, well-known companies from Australia and the US. Each episode we're also joined by an expert to help us unpack the key metrics, the bull case and the bear case for each company. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How you going? 

Alec: [00:00:44] I'm very good, Bryce. I am excited for this episode. It is a fascinating company and one that will make us hungry. Lucky we've just had lunch. We are talking about Chipotle. Chipotle? Or as you call it, chipotle. 

Bryce: [00:00:57] Chipotle, chipotle, chipotle. Whatever. Same thing. 

Alec: [00:01:02] What about Australia's Guzman?

Bryce: [00:01:03] That's whatever. Have you had Chipotle?

Alec: [00:01:06] Yeah, yeah, yeah, yeah. It's Australia's because it's fast. 

Bryce: [00:01:11] I think Guzman's better. 

Alec: [00:01:12] Okay. Yeah. So I'm not making a judgement call about one thing better than the other. I'm just saying, like, very similar food offerings. I feel like you're really splitting hairs. Yeah. All right, get ready for a very testy episode of Equity Mates Summer Series.

Bryce: [00:01:31] Equity Mates Summer series is proudly supported by Sharesies and there are a couple of reasons that we really get around Sharesies the first is that you can invest with no minimum you can buy shares or portions of shares on the shares platform for just $0.01 and couple that with the ability to auto invest and you are getting into the markets incredibly easily. Yeah, it's accessible. You get access to Australian markets, US and New Zealand and you can dollar cost average, you're hot to your heart's content. How auto invest, how good. 

Alec: [00:02:01] It used to be that brokerage cost you as much as chipotle. I charge for walk now it's as much as Chipotle. They charge you for some extra coriander. 

Bryce: [00:02:13] Yeah, well, let's let's not get caught on the technicalities, but you can get started if you want to get started investing the shares use the code GROW when you sign up to the shares platform for ten dollars into your account. Ready to invest promotion Ts&Cs apply. Now this code is not Equity Mates specific. It's publicly available to anyone and we don't get any kickbacks from it. It's just for you if you want to get invested with Sharesies so I head to Sharesies.com.au to learn more or download the shares is up today and a reminder we are not licenced. We are not aware of your personal circumstances. All information on the show is education and entertainment purposes only. 

Alec: [00:02:49] Do not take investing advice from a podcast.

Bryce: [00:02:51] We do have an expert in the second half of this episode. Emma Henderson from Magellan will be joining us in the studio to help us unpack the metrics Bull Case and Bear Case for Chipotle. Chipotle in one sentence. What have we got?

Alec: [00:03:05] I'll give it to you in two words. America's Guzman. Oh, it's a chain of fast, casual Mexican restaurants. 

Bryce: [00:03:13] Okay. America's most famous, I guess. And we've both tried started in 1993 in Colorado. There you go.

Alec: [00:03:21] I would say I haven't read that part of the text. Yes. I didn't go. What did you think of it? It started a bit. 

Bryce: [00:03:28] Closer to the border. Yeah. 

Alec: [00:03:29] Wrong, obviously. So Steve Ells, he's the guy that started it. He originally planned to use funds from Chipotle to open a fine dining restaurant, calculated he would need to sell 107 potatoes a day to be profitable. After one month, he was selling over a thousand burritos a day. Great story. Pretty epic that he started with one store and grow it into the giant that it is today. Let's not kid ourselves that it's not quite a rags to riches bootstrap story that you might see on some media. He got an $85,000 loan from his dad and then his dad invested another 1.5 mil. 

Bryce: [00:04:10] Must be nice. 

Alec: [00:04:11] Rags to riches, baby. 

Bryce: [00:04:13] I mean, still, a lot of people take loans and investments and don't turn it into the success of. So he's done incredibly well. 

Alec: [00:04:22] Epic story. 

Bryce: [00:04:23] I guess then the question is, Ren, did he sack the idea of starting his fine dine restaurant? 

Alec: [00:04:29] No. Chipotle is a chain of fine dining. Yeah, exactly. By 1998. So five years after launching, he had 16 restaurants still all in Colorado. And McDonald's became an investor and it exploded by 2006. It IPO, it was a hot IPO. In 2006, Maccas actually sold out. So when Mac is invested 98, six stores, 16 restaurants, eight years later iPod Mac is sell this shares 500 locations. Wow Mac is turn 360 million into 1.5 billion. Who sells French fruit is sell French fries. 

Bryce: [00:05:13] I love to see that. And by 2015, Ren, it had more than 2000 stores. So incredible. Expansion story. Over, what, 20 years or so? Or a bit more. 

Alec: [00:05:24] And now it's got about 3000 stores.

Bryce: [00:05:27] Just keeps on growing. 

Alec: [00:05:28] Just keeps on growing. Derek and Mack as a kicking themselves.

Bryce: [00:05:33] I don't know. Good question. Thanks. 

Alec: [00:05:37] Yeah, I mean, they're doing all right. Yeah. 

Bryce: [00:05:39] They're going to run. In 2020, Steve Ells broke all ties with the company. He was replaced as CEO in 2018. And in 2020, he resigned as chairman and left the board.

Alec: [00:05:48] They've also left Colorado, and now they're based in California. There's two things that we want to talk about when we talk about history before we really get into what the company is today. Healthcares. Because if you were an investor in like the mid 20 tens and looking at America, that's probably what you think about when you think about Chipotle. And then other concepts. Let's start with other concepts. 

Bryce: [00:06:10] Sure. So Chipotle has tried to launch other restaurant concepts and you could say without a lot of success. 

Alec: [00:06:16] You could say because it's true.

Bryce: [00:06:18] Soul daddy. I never heard of it, obviously, because it closed with an eight way. 

Alec: [00:06:22] Closed with it eight weeks now. The backstory for Soul Daddy. There was a TV show, America's Next Great Restaurant, something like I think that's what it's called, all like America's. Yeah, America's Next Great Restaurant. Soul Daddy, he won that competition. Steve Ells was a judge. They launched it closed within eight weeks.

Bryce: [00:06:39] I mean, surely do a bit more due diligence around that. Well. 

Alec: [00:06:42] Surely there's enough post TV show buzz to still last a couple of months.

Bryce: [00:06:48] What channel was it on it. What? What food was it focussed on. Soul food. Yeah. Like centred menu. Yeah. Like soups and stuff. Like soul food. 

Alec: [00:06:56] No, like American soul food like from the south. Like, not like well, like chicken.

Bryce: [00:07:07] Soul food centred menu. Okay. Anyway, that's dead. Dead in the water. Say, founded 2nd of May 2008, ceased operations, I think last year, 28th of June 2011. Heartbreaking. The next one, next spin offering, was ShopHouse. Southeast Asian Kitchen opened in 2011, lasted a little longer than eight weeks, but it did close six years later in 2017.

Alec: [00:07:32] Yeah, Southeast Asian kitchen. You can imagine what that is. Thai. Yes, Malaysian. Indonesian. Good food. It's not in Chipotle's core competency. 

Bryce: [00:07:41] Those tasty made burger restaurant was the next one. Yeah. Awful name opened in 2006 and closed two years later. 2018. 

Alec: [00:07:50] Now there's one that is still operating. Pizzeria Local Partnership. So they were also they still are, I think, a Colorado restaurant kind of like the Macca's story. You know, how the original Mac is wasn't owned by McDonald's and then Ray Kroc like got the rights to expand it. Yeah, similar story here. The original pizzeria locale is in Colorado. They're still running their business, but Chipotle got the rights to expand it and franchise. It started in 2013, I believe still operating. Not sure how big or how many but Chipotle is a company that has expand the concept and it hasn't really worked well. 

Bryce: [00:08:34] Not even really to expand the concept. Just try and launch new sorry. 

Alec: [00:08:37] Restaurant, expand business. Stick to what you know, expand the concept. Just want to. 

Bryce: [00:08:41] Start new businesses. Yeah. 

Alec: [00:08:42] Just keep slinging Glock. 

Bryce: [00:08:44] Exactly. So that's the new concepts Ren. But what about the health care side of the health care? The health. 

Alec: [00:08:50] System has hospitals well get you sick with operators and will treat you. 

Bryce: [00:08:54] The health scares side of things because it was quite significant at one point. 

Alec: [00:09:00] Massive. Yeah yeah yeah. 

Bryce: [00:09:02] So much so that it could have ended the business. 

Alec: [00:09:05] So 2015 was the year that we were living together in Australia. And I remember that was when we were first sort of getting into investing and I remember listening to a couple of American investing podcasts and this was big at the time. Yes, this is how I think about Chipotle. I still yeah. What I think they've had a number of health outbreaks. So what didn't start in 2015? They had a hepatitis outbreak in 2008 in San Diego, California. And also in 2008, they had a norovirus entero norovirus outbreak in Kent, Ohio. Then fast forward to 2015. It was a tough year. In July, they had an E coli outbreak in Seattle, Washington, August, they had a norovirus outbreak in California. Also in August, a salmonella outbreak in Minnesota, October E Coli in both Washington and Oregon. November, they had more E.coli in Kansas and also in Oklahoma. December, they had norovirus in Massachusetts, including 80 students from Boston College getting sick from a single Chipotle restaurant. 

Bryce: [00:10:16] As if the FDA doesn't walk in and go. Guys, you had an absolute shock of the year.

Alec: [00:10:27] You know, we joke about it now all these years later, but that's like get shut down.

Bryce: [00:10:31] That was 2005. And I'm just looking at the share price during that period. So it was from the start of 2000.

Alec: [00:10:37] And sort of about the middle of the year. 

Bryce: [00:10:39] Okay. So mid-year 2015. Yeah. Okay. So June it bombed. 

Alec: [00:10:45] Yeah, August. It seemed like it really tanked. Yeah. 

Bryce: [00:10:48] I mean, as I think down about 20% since the start of June from mid 2015. 

Alec: [00:10:53] So but I think this is the story taking. It's not like people stop buying burritos. Yeah, Chipotle is like was is and was and is a phenomenon like people love the food just like you take a call like that. 

Bryce: [00:11:07] And it's fascinating and this yeah you say it's I mean this stock appears in some of the biggest investors portfolios around the world, most notably old mate Bill after Bill Ackman. Yeah. He loves this stock. Does he. Yeah. Yeah. 

Alec: [00:11:24] Because he loves what? He loves the restaurant brands as well. Yeah, yeah. 

Bryce: [00:11:27] That's in here.

Alec: [00:11:27] In February 2016, Chipotle closed all their restaurants nationwide for a few hours for an all staff meeting on food safety. And things did start to turn around, but it didn't quite get there. July 2017 Another neuro virus outbreak in Virginia. Chipotle's stock dropped 10% in July 2018. Cluster iridium fingers. 

Bryce: [00:11:53] Another food issue.

Alec: [00:11:55] Per finger and no. 

Bryce: [00:11:56] Fragrance preference. Yeah. Okay. 

Alec: [00:11:59] Well, I'm sure other people that got sick. Yeah yeah. So and look that that was a key reason why Steve L Scott the first week end because, uh, there was just too many issues. And so he left as CEO in 2018 and got replaced. I think it was the ex Taco Bell CEO, which some people were like, Chipotle is trying to do the opposite of Taco Bell. But also people are like, well, this is someone that's run a nationwide thousand odd store food franchise and it seems like they've got their food safety issues under control. 

Bryce: [00:12:34] Well, I mean, you'd touch you'd hope so. They've had very 20 years to sort it out. So one of the major differences between this sort of fast food world, but between Chipotle and many other fast food restaurant chains, is the ownership structure. It's not a franchise. Yes, it is wholly owned by the parent company. Yeah. 

Alec: [00:12:54] So what that means is you go to a Maccas around here and chances are, well, anywhere in the world, really, chances are it's a local investor that owns the Macca's and McDonald's. The parent company owns the system. They own the branding, they set the menu. They do a lot of the marketing. But, you know, it's the local investors that buy the the rights to do local matches and make the revenue and they just share a percentage of their revenue back to the parent company. Price often tells me about the guy that owns the Macca's in Wagga who had a Ferrari and his kid had a Ferrari. Yeah, good business. Only five Mac is own. Five Mac. Yeah, Mac is Baron. Time. But there's no chipotle barons over in the US except for Steve Ells. Because Chipotle owns and operates all those stores. It's not like there's franchisees running around. 

Bryce: [00:13:41] Yeah, yeah. Primarily located in the States, Canada, UK, France and Germany. I don't think there's one in Australia. Yeah, I think. 

Alec: [00:13:48] Guzman's too strong. 

Bryce: [00:13:49] Could. Yeah. 

Alec: [00:13:50] And Guzman has gone to the expansion corp that those. 

Bryce: [00:13:55] Expansion plans in the States will actually are expanding with drive thru Mexican as well. 

Alec: [00:14:00] Yeah. Now that's a really interesting point. So Stephen Marks, the founder CEO of Guzman who we've had on the show before going listen to it. It is an epic interview got price I'm super jacked about Guzman and I know we walked out. 

Bryce: [00:14:14] Like it's about entrepreneurship.

Alec: [00:14:16] How can We in this. No but he is bullish on drive thru fast fast casual Mexican Mac is when they invested in chipotle in 98 tried to convince them to do drive thru and they said no. 

Bryce: [00:14:31] There you go. 

Alec: [00:14:32] So 20 years later, who's right? I've never done drive thru Guzman have you. 

Bryce: [00:14:38] I don't know.

Alec: [00:14:39] Does it is in Australia. Yeah it's a thing. So anyway we will say but yeah. Going head to head over in the big market. 

Bryce: [00:14:45] I love to say it. Well Ran let's take a look at the numbers. Market cap of $42 billion. The stock is down 10% year to date. So you could say it's outperformed the market. It is up 393% over the past five years, though, pumping out $7.5 billion in revenue, up from 3.9 billion five years ago, increase of 92% in revenue over the past five years. And they are profitable $653 million in profit, up from 23,000,005 years ago. So seriously churning out profit, that's an increase of 2,700% in their profit number in the past five years. So no wonder some of the world's biggest investors are getting around Chipotle. If you have a look at the chart from 2017, it kind of bottoms out and in 2008. And then it just has. Absolutely has. So. 

Alec: [00:15:38] Now, in terms of competition and the industry and where the company sees its future, I mean, more Mexican restaurants expanding overseas probably. Hopefully the new leadership isn't going to try and do different concepts. If I was an investor, an investor in Chipotle, I'd say just do Mexican and do it well. Yeah, don't worry about it. 

Bryce: [00:16:01] Surely they figured that out. 

Alec: [00:16:03] Well, they've still got pizza. Real local. Spin it off. Separate company as well. You know, in America you don't know. Maybe that name slaps in Colorado is.

Bryce: [00:16:13] Not even a yeah, sure. 

Alec: [00:16:15] But when we were doing research for Chipotle, the main competitor, Guzman was not listed as one. Tell me if you've heard any of these other fast casual Mexican franchises either in the US or chains over in the US. Yeah. Cordoba, Mexican eats most Southwest Grill. Baja Fresh Mexican Grill. Rubio's coastal grill. No. Yeah. So, like, Chipotle owns the Mexican category.

Bryce: [00:16:41] Taco Bell. 

Alec: [00:16:43] Is that Mexican? 

Bryce: [00:16:45] It's awful. That's what they. 

Alec: [00:16:46] Say. That's a little bit like the competition is with all of these other. 

Bryce: [00:16:52] Non mass food. 

Alec: [00:16:53] Yeah, well it's. Yeah. 

Bryce: [00:16:54] Mac is five guys in and out burger. I know. My Mac I know, I know. I know my you as fast food. 

Alec: [00:17:02] Oh, my God. KFC, Popeyes Fosters, KFC. True. What's the the Christian one that doesn't open on Sundays tonight? We got a side. Now we got to figure this out. The advertising is like Carl's telling you to a to. 

Bryce: [00:17:21] Chick fil A. Chick fil A. 

Alec: [00:17:22] I know you do American chains. 

Bryce: [00:17:26] I'm Googling Pizzeria Locale and there's one in New South Wales. 

Alec: [00:17:30] No way can we go. 

Bryce: [00:17:31] Check it out. What's a mediterranean? Mediterranean? 

Alec: [00:17:34] Well, are you sure it's the same company? 

Bryce: [00:17:37] No, it would be completely. It's probably like cold pizza. 

Alec: [00:17:40] It's like a Burger King thing where someone's like in the night. 

Bryce: [00:17:42] Yeah. Yeah. I mean, no one's fact checking pizza, like. 

Alec: [00:17:46] No, no, no. It's like Burger King. How it had to be called hungry. Jack's here because someone got the trademark first. 

Bryce: [00:17:51] I just don't reckon it's that big over there. 

Alec: [00:17:53] We should open a Chipotle. Yeah, the trademark. 

Bryce: [00:17:57] I don't think it would be that big Chipotle. I know. Pizza like. Oh, okay. A thousand is cooking up a thousand anyway. 

Alec: [00:18:06] A thousand stores? No. Why? 

Bryce: [00:18:08] Well, it's saying Chipotle locally is cooking up growth at a thousand degrees. I didn't click on the headline. 

Alec: [00:18:15] I feel like we are fast turning into drivel. Let's get an expert in here to write this.

Bryce: [00:18:21] So Chipotle is available on the New York Stock Exchange. The ticker is CMG and you can access the US stock market, plus the Australian and New Zealand markets on the shares. This platform with no investment minimum the shares. This platform was awarded a 2022 Canstar Innovation Excellence Award, with the judges saying the platform is unique with a significant wow factor as it reduces barriers to entry for new investors. So check out shares. These shares, these dot com bubble investing involves risk. This is not a recommendation and you should perform your own research, promotes and sees apply. But we are going to take a very quick break and we'll be right back to discuss Chipotle with Emma Henderson from Magellan. Alright Ren, we are back after a pretty loose opening to the episode.

Alec: [00:19:13] I think. I think we needed that break. Take a deep breath. 

Bryce: [00:19:15] I'm excited to have an expert in the studio to help us unpack the plotline a little bit more detail. And we we have Emma Henderson, investment analyst at Magellan. Emma, welcome. 

Emma: [00:19:26] Thanks for having me. 

Alec: [00:19:27] Now, Emma, before we even get to the first question, is it Chipotle or Chipotle? 

Emma: [00:19:32] Oh, look, I've heard it pronounced so many different ways. I go with Chipotle. 

Alec: [00:19:36] It's definitely not Chipotle. They're not supposed to know. Well, let's we've unpacked a bit about the company, about its history, sort of what it's doing today. Now, we really want to put the investment lens on and unpack how we should think about it as an investment to start with. When you're analysing in a company like this, what are the metrics that matter? What are the things you're really looking at? And is there anything that doesn't matter that you might hear about in the media that you think people shouldn't be thinking about that number when they're looking at a company like this? 

Emma: [00:20:07] So maybe just to start, we're quite lucky with Chipotle. It's a pretty simple business to analyse. So we're talking about one brand, one geographic market, say the United States. And it does one thing, operates Mexican restaurants. 

Alec: [00:20:19] And pizza locale. 

Emma: [00:20:23] Like it, which I can tell you I've spent November. 

Alec: [00:20:27] Zero that out the investment case.

Emma: [00:20:29] Actually run the brand that yeah one market one thing and but when we are looking at a company a restaurant company like Chipotle. At the end of the day, this is really a store rollout story. And there are a couple of key metrics or a set of metrics that are really important. So the first set of metrics that we spend quite a bit of time on when building an investment thesis in this space is, you know, what does the underlying economics of running a burrito restaurant look like and is that something that's attractive? And then once we get our heads around that, the next thing is all about growth. So how scalable is this concept? And, you know, how fast do you think it kind of can reach that potential? So if I start with, you know, trying to break down a little bit what those economics are of every restaurant that Chipotle operates, the first piece of information you're looking for is, you know, how much does it cost to build one of these things? Because, you know, the maths is important coming back to that. So Chipotle stores are pretty simple. They don't require a huge kitchen. It's a pretty simple menu. So relative to other concepts out there, it'll cost the company about us 1 million to open one of these things. It sounds like a lot, but relative to other concepts, that's actually not too big. The next kind of key metric that you want to know for these kind of businesses is when you open a store, how you know, how many, how much sales can you bring in? What's the productivity of that unit? The average Chipotle restaurant in the US generates around 2.6 million in annual sales. And that ranks it right up there with some of the biggest QSR quick service restaurants or limited service funds. So, you know, something like McDonald's will be ahead of it, but it's right up there. Part of that is because the brand is just so well-loved like you'll have seen. I think there's more names out there about lines out the door, people trying to get into Chipotle restaurants and also the efficiency of that kind of operating model. So the speed that they can churn people through because, you know, the kind of a lot of it's already prepped. You go in, you order. You know, they get a lot of people through the door. So that's kind of how you get to pretty attractive, what we call average unit volumes or average sales. The next thing that matters in this space is how efficiently you can kind of turn those sales into profits. From the beginning. Chipotle founder Steve Ells has always been focussed on simplicity, so he never lets the menu get too big. You can order bowls burrito, you can order tacos, but that's it. I don't want to kind of make it any more complex than that. And then that kind of assembly line process that I spoke about is super efficient from a labour perspective, you don't need that much space from rent. So what that means is that Chipotle has what we call restaurant level margins of 25%, so they can turn 25% of that 2.6 million into cash returns. And again, that is phenomenal in the industry. 

Alec: [00:23:11] What would the comparison be? 

Emma: [00:23:13] So maybe if I use McDonald's as an example so they can actually get more sales through the door, but their restaurant margin and they are you know, they're one of the best of the best ride operators. They're more at the mid-teens margins. So, you know, that kind of shows you the gap and makes it you know, now we start to understand, hang on, there's something in this burrito business that makes it an interesting place to be and then just kind of wrapping that all up together. So I said it costs about 1 million. He said 2.6. You can kind of turn that into profits at 25%. You're in a full year of operations. You're getting 60% of that initial investment back. And the other metric that, you know, you might hear talked about in this space is what's your payback period for Chipotle that's less than two years super attractive. And it also helps explain I'm not sure if you mentioned this in your intro, but why should. Has elected to keep building and operating all of the stores itself other than, you know, compared to other chains like Maccas or Domino's that use franchisees just because the economics are so attractive. 

Bryce: [00:24:12] why wouldn't You? 

Alec: [00:24:12] I mean, why wouldn't we mention that they were all company owned? We didn't explain why, and that's why we're really thankful you're here. 

Emma: [00:24:19] So, yeah, that's the first set of metrics that we look at. And then the second set of metrics that we're focussed on is what's the growth potential from here? So, you know, the key things we're looking for when we're talking to looking at restaurant companies is, you know, what do you say, the long term store growth potential, you know, then on an annual basis, how many stores can you kind of do each year? So what does that mean for you growth? And then are there any kind of initiatives in place to lift those kind of average unit sales and restaurant margins higher than what they are today? So that kind of the key metrics that all are all about growth. The one I'll just touch on and sorry if you've already covered it, but over the long term, Chipotle is targeting to reach 7000 restaurants in North America. Wow. So we're at 3000 today, but that's, you know, more than double still to go. To give you an example. Taco Bell. So that is actually the largest Mexican chain in the US. But it's interesting. I wouldn't really call them direct competitors because Taco Bell is very much kind of fast food, you know, one $2.3 kind of value menu, whereas Chipotle is targeting a slightly higher end kind of, you might think like a corporate lunchtime consumer. So same category, but slightly different. But Taco Bell is already at 7000 restaurants today. They're still growing their business, kind of the number of stores, 2 to 3% per annum. So gives you an idea that that kind of scale is achievable. But Chipotle is just a lot earlier in its kind of growth lifecycle. 

Bryce: [00:25:45] Wow. 

Emma: [00:25:46] Chipotle does trade on a higher multiple than a lot of its peers. So I think as of today, it's around 36 times one year forward pay. And if I compare that to some of the more mature restaurant listed players, they're more like 20 to 25 times. And what that reflects is the stage that the companies are in that growth lifecycle, because there is just so much more growth to come. And this business is also growing pretty fast on a year, on year basis. So they think they can grow their store base at 8 to 10% per annum. They're also doing other things to improve those average sales and margins. They get leverage on corporate costs as you grow buying back shares. So all in all, we think this business can kind of generate 20% earnings growth for shareholders over the next couple of years. That's some of the background on why it trades where it trades.

Bryce: [00:26:35] Wow, what a business. Yeah. It surprises me that they have such an incredibly strong brand given the disaster they had in the food, health, the health, food, health, food, the food, health, safety, food safety, safety and safety for a number of years. It's just like phenomenal people have just stuck around, like in other businesses that would shut you down. 

Emma: [00:26:58] Yeah. And I think that's been so interesting for everyone to follow because it'll come back to, you know, I think we'll talk a little bit later on the competitive advantages and you know, this had a really strong kind of product that it offered its consumers. It invests really well in its brand. And the fact that it could come back from that is amazing. Says they have something pretty special. 

Bryce: [00:27:17] Yeah, just burritos. Well, let's move to the the bull case. We're really interested to understand what you see as the competitive advantages for Chipotle. And, you know, what is it other than just a story of more and more stores that, you know, builds a bookcase for you? 

Emma: [00:27:35] Yeah. With the bookcase for Chipotle. Given like these brands now been around for 30 years, it's got a pretty proven set of products, a pretty proven economic model at the store level. We don't actually really need to believe that they develop a new set of competitive advantages. But what we want to see is them continuing to invest in their brand, in their products, in their stores, because competitive advantage is a key in the restaurant industry. It's a super competitive space, it's highly fragmented, it's really entrepreneurial. So new concepts come and go. But we do have a lot of confidence that what they've built over 30 years is pretty sustainable. The first thing that it really all comes back to is, you know, what's that value proposition that you give, you provide to your customers? Why do they pick Chipotle out of all the other options out there? And I think what it comes down to is they kind of have this unique combination of they offer you food that's at a reasonable price point. It's pretty substantial in volume. Like you get a lot of food for what you're paying for. It's tasty. They have this proposition where they use fresh rather than frozen ingredients. They try and source kind of locally and organically. And so when you kind of put that all together and the fact that you can get it in a really convenient, quick way, they just kind of found a formula in a nation, the market that worked. That's not to say that no one else can do that, but they found a spot and they scaled that. And once you get. Scale in the restaurant industry. It gives you a lot of other competitive advantages. So, you know, the first thing that comes to mind would be your supply chain. So as you get bigger, you can get better deals, which means that you can kind of keep the best value for money for what you're giving going. The other thing is from a brand awareness point of view. So now 3000 stores, Chipotle is working with a modest annual marketing and promotional budget of 250 US million USD $250 million. That lets them do things like advertise at the Super Bowl, which they've done for the past two years. So as you kind of they found the successful model, both scaled it and then it kind of becomes this virtuous cycle. The other area that I think scale really plays into in the restaurant space is your ability to invest in digital. And what that means in terms of, you know, making sure your brand stays relevant, that you have great experience for your customers and you know that that economics kind of keep improving over time. So Chipotle has a lot of really interesting stuff in this space. Their restaurants, like they were so well ahead of digital leading into COVID, they'd already equipped all of their restaurants with you. So you might be familiar. There's like a what we call a front make line at the front of the restaurant. So you go in, you see people there, you know, standing line in line, what they've done ahead of COVID. Without the foresight, they'd already set up a separate make line in all of the restaurants, which is purely to fulfil all the digital orders. All right. They've always had digital kind of on the brain. It's part of their DNA. They also pioneered a new store format, which is called at Chip Lane, which is a digital only drive thru. So you don't actually go up and speak to anyone in the drive thru. You put your order in on your phone, but when you drive up, it's like you get given a window and you there's no labour involved. So it kind of gives you an idea of, you know, kind of how cutting edge these guys are in the space. 

Alec: [00:30:57] So that's interesting. So they do have drive thru now. 

Emma: [00:31:00] They didn't at the beginning but now. So you know, I said before they're opening up a whole bunch of new stores. Most of those new stores now at Chipotle Lane's. 

Alec: [00:31:08] Okay is that because they've seen Guzman come to the US with their drive thru lanes? 

Emma: [00:31:14] Look, I think everyone's been arguing in this space. I think they wouldn't they would say it hasn't even crossed there yet. 

Alec: [00:31:20] Oh, it will be. Well. 

Emma: [00:31:22] I think, you know, the US has been a huge drive thru market for a long time. But the thing is drive thru real estate is pretty hard to get. Everyone wants a drive thru. So again, as you scale and as you kind of prove yourself, you get better deals. Suddenly you become a tenant of choice and you can kind of bid for some of those prime drive through real estate locations.

Alec: [00:31:42] Yeah. 

Emma: [00:31:42] And the one other one I would mention just on competitive advantages, because we're seeing this more and more in the consumer space, not just restaurants, but it comes down to kind of loyalty programmes. I'm not sure we've seen other brands talk about it, but Chipotle has a loyalty programme called Chipotle Rewards. As of last quarter, that programme had 30 million members registered. So a staggering that's almost one in ten Americans. It's more than the entire population of Australia. And when you think about competitive advantages over time, if you have people registered in your system every time they shop with you, you're learning about their behaviour, you're learning about what they like, what they don't like, how frequently they come. You can direct targeted messaging to them. So that's something that I think is sometimes underappreciated as a competitive advantage that comes with scale and digital because good luck to a small chain, even good luck to Guzman coming in. When you think about what Chipotle is already doing in that space and these advantages, like it does become quite hard to compete. So I think that kind of covers off the competitive advantages. And then the investment case here is basically that Chipotle can sustain that brand appeal and can open 1000, 2000, 3000 more restaurants and scale what's already working for them. And, you know, that's really what's driving the earnings growth here. 

Bryce: [00:33:03] Wow. 

Alec: [00:33:04] Yeah, it's a fascinating story. Let's turn to the other side of the coin. Let's turn to the bear case. What would break that thesis and what would you know? What are the things that you're most concerned about? 

Emma: [00:33:15] Yeah. So Chipotle, as I said before, it has trades on a pretty high price to earnings multiple. And what that means is more than other restaurant concepts, it's priced for high growth. So probably on a more like near term view that, you know, obviously there's lots of fees around recession and everything at the moment. So that I don't think is as important to the longer term case. But if you start seeing those sales per store, you know, come down because of a recession or the margins get weaker because of, you know, disruption going on in the market, that could cause a little bit of share price volatility for any stock that some kind of that high of multiple. We think Chipotle will probably be relatively economic resilient. Some people will trade down to like a McDonald's, which is cheaper, but they'll also be people that say. Hang on. I'm not going to pay $15 for expensive salad if I can get something cheaper that actually feeds me more at a Chipotle. So we don't think this business falls off a cliff. But when expectations are so high, you know, through periods like this, there can be some volatility to be aware of. What we would be more worried about for the longer term investment case would be if we started to see any evidence that, you know, that kind of 7000 store growth target was too ambitious. And actually, we're starting to now open stores that aren't opening up with as good a sales volumes and as good a margin. So those are the key things we're watching. To be clear, they're opening out new stores that are performing super well today, but that would be something for anything that's got kind of that longer term rollout. You want to make sure that you're not kind of deteriorating the quality of your financials or cannibalising existing stores, etc.. So that's what we have. One thing we're watching. The other thing to be aware of when looking at a a restaurant company like Chipotle, which does operate all of the stores directly, unlike the franchisors, it is exposed to, you know, all the costs that you think about in a panel. So we wouldn't want to see any big adverse challenges in their key costs. So on the food side, it's meats, it's produce, it's packaging. So that's about 30% of sales. And then they also are quite a labour intensive business. So wages anything to do with that, you know, that's 25% of sales. So, you know, we're watching it, though. You know, if they were ever going to drastically lift minimum wages or something like that is something to think about with this this business, the militant there is whether you have, you know, customers that love your brand and probably will accept a little bit of a price increase to cover those costs. So what we want to see is pricing power. 

Alec: [00:35:40] Surely they have the margins to where some of those costs as well. 

Emma: [00:35:42] They do. But from an investors perspective, you know what I mean? If it's already priced there, our expectations. So if they do they this business is this business could eat a lot more margin instead of fat intended. And and then the final thing with I guess a company that's growing as fast as this is that they are they can be kind of speed bumps to growth to come out of the blue or self-inflicted. I'm sure you guys spoke about the food safety, the series of food safety scandals, but. 

Bryce: [00:36:11] Hasn't stopped them. Hasn't it? 

Emma: [00:36:13] Hasn't stopped them, but it was grim for a while there. Right. So, you know, I think from peak to trough, the share price went from $750 to almost $250. Right. So that's an example of where there was a massive resetting of growth expectations by the market when people were worried that this growth story that they'd bought into was starting to unravel. Hmm. It is an interesting example, though, of, you know, businesses like this can fall on challenging times and things can kind of come out like like a this was a disaster, like multiple, multiple food scares across multiple stores. But as investors, I think you take those times to really try and distinguish like, is this a permanent structural challenge to this business or is this something that could make it really challenging in the near term but could prove temporary? There were some really smart investors that took big stakes in Chipotle at the trough of that kind of food scandal that believed in the brand new, had friends that loved the brand and maybe stayed away for a little bit, but thought they'd come back. And they really understood that underlying economics and knew that this business was a cash machine. So for people that could kind of try and look through it and know they didn't know exactly when all the customers would come back, but they thought that they would over time. That was a pretty lucrative investment. 

Alec: [00:37:29] Yeah. Now, in 2018, Steve Ells steps down as CEO, probably largely because of the health scares for food safety scares. And he's replaced by the CEO of Taco Bell. 

Emma: [00:37:42] Yes.

Alec: [00:37:42] Two years later, Steve Ells leaves the business entirely. We hear time and time again the value of like a founder owned mentality. He's now completely left the business. How do you think about the business now being run by, you know, professional class of managers rather than the founder being involved?

Emma: [00:37:59] Yeah, it's a it's a really interesting question. You know, there are a lot of really attractive things around founder led businesses. But I think what's been clear since he left was that that culture that he has kind of, you know, instilled in this business has carried on. And they've obviously picked some pretty good stewards of that culture. And Brian Niccol, he's the current CEO. Jack, who's the CFO, has been there since the beginning. So they've got a lot of experience management there. So, you know, there's been nothing that we've seen in the business that suggests that has been, you know, deteriorating. And if you can keep all of that going through COVID, yeah, like if if something was going to fall apart, you know, the fact they've got through this, I think is pretty impressive just on founder led businesses as well. We've also seen examples, though, where founders step back and the businesses can't. There's just something that doesn't work without that founder there. And then we see management turnover. The founder has to step back in. So I think Chipotle had grown to the. Scale. And it had this kind of corporate maturity that, you know, we now also hear businesses talk about going from founder led to founder inspired. It's actually kind of a healthy evolution for the business because if a business can't operate without its founder, you know, longer term that presents some challenges. So I think this has been an example where it seems to have worked well.

Bryce: [00:39:20] Fascinating growth story. If we're looking ten years down the track, what do you expect Chipotle to look like? 

Emma: [00:39:28] So if we fast forward to 2032, my guess is that this company's probably doubled the U.S. store. So I reckon we're now at about 6000 restaurants in the US. That still leaves some growth and I think it's still going to be taking market share. The reason why this business is growing so fast is that it's tight. It's, you know, it's growing well ahead of the industry. So it's taking share from smaller players because of all those scale advantages, but also taking share from other kind of segments. So it's taking share from sandwich shops and burger joints and bringing people in. So we think there's a long runway to go. You know, Mexican food still like, you know, lots of us love it, but there's still a long runway for it to keep taking shape. So in ten years time, I still think this business is growing, probably not at the pace that it is today. So we would expect that that kind of pay multiples probably normalised a bit as it's gone through, you know, become a more mature concept. I think another thing we could be talking about in ten years time is international expansion plan. So probably covered off that they really, really got a handful of stores today. This management team is super methodical in how they do things. They never hit go until they've got a formula. Right. So I think we're still at the stage where we're trying to make sure that the brand is positioned in the right way, that they've got that economic model working. I didn't think they hit it. They won't accelerate that until until they've kind of sorted through what they're trying to get to. But again, Taco Bell is another example where they have brought Mexican to international markets and it's worked. So it's not really something we talk about much today. It's not really in the price, but it's kind of upside if they can get that working that maybe in ten years time US store growth has slowed, but we're talking about an international story. The other thing, and I think is going to be really interesting to think about in ten years, is do the restaurants themselves look a bit different? One of the digital things that Chipotle is investing in is robotics. So they have a tortilla chip making robot called Chickpea. And I look, it's really early today. It's I think it's being piloted in one store and it's not going to move the needle now. But I think what this business is doing and they've got the budget and kind of the foresight to do is think through what are the tasks that human labour does in our restaurants today that we could ultimately replace with a robot or some kind of system. So Chip is the one that's most advanced. They also invested very recently in this system called hyphen. It's worth a Google, but it kind of looks like it was made for Chipotle. It's like this big or like autonomous manufacturing system that if they could get this working, like they could put that in the back of the restaurant. And I think I don't think it would be able to make burritos because, you know, there's some wrapping and like tricky kind of manual things in there. But a mexican bowl, it looks like it could almost do that from start to finish. So look, very early days in this space, but things to keep an eye. 

Alec: [00:42:23] On that's going to increase the million dollar CapEx to build a store. 

Emma: [00:42:29] The maths might have to. 

Alec: [00:42:31] Improve margins, but. 

Emma: [00:42:32] They'll try it and see if it works. Yeah. But yeah so we'll see. 

Bryce: [00:42:36] Wow. Who would have thought this so, so much to just a simple burrito. What a fascinating story. Fascinating company. No wonder some of the biggest investors in the world hold it in their portfolio. But thank you so much, Emma. It is available on the New York Stock Exchange. The ticker is CMG. You can grab that on the Sharesies platform shares is secondary you to learn more. But Emma, it's been an absolute pleasure. You've really did a better job than Ren and I did in the first half of the year. So, yeah, thank you. But a fascinating conversation about Chipotle. Thank you very much. 

Emma: [00:43:09] You're welcome. Thanks, guys.