Yahoo Finance 3 Reasons Chipotle Ended Its Burger Chain Experiment
Chipotle Mexican Grill's (NYSE: CMG) star continues to lose its luster. The burrito chain said it would close its only Tasty Made location just 15 months after it opened as its performance has been underwhelming. Chipotle spokesman Chris Arnold told the Lancaster Eagle Gazette, "While we liked the concept and the delicious food at Tasty Made, the economics were not what we wanted them to be so we decided to close that restaurant."
For Chipotle, it marks the second of three alternative concepts that the company has shut down, following the closure of all 15 ShopHouse Southeast Asian Kitchen locations a year ago. Only Pizzeria Locale now remains from those three seed brands, and that concept has been growing at a snail's pace with only seven locations across the country, after Chipotle took a stake in the restaurant more than four years ago.
Founder and outgoing CEO Steve Ells has long believed that the Chipotle model would be transferable to other kinds of cuisines, but with the failure of two new concepts and Pizzeria Locale's slow growth, he seems to be abandoning that idea. Alternatively, competition in the fast casual space has simply caught up, and Chipotle's assembly line format of serving fresh, organic food is no longer unique.
The Tasty Made location, itself, suffered from a lukewarm response to its food and initial problems with pricing. The chain actually switched from organic to conventional beef in order to lower prices, but even that move was not enough to bring customers in. Recruiting celebrity chef Richard Blais to boost the brand was also not enough to make a difference.
On Yelp, Tasty Made received just three stars from 85 reviews with some customers comparing the burgers to ordinary fast food from McDonald's or Wendy's. Still, pulling the plug on Tasty Made now, before wasting more money on it is probably the right move. Here are three reasons why.
Image source: Chipotle.
1. The burger biz is already crowded
No corner of the fast casual sector is more crowded than the burger space. Recent years have seen IPOs from Shake Shack and Habit Burger, the expansion of privately held better-burger chains like Five Guys, In-N-Out Burger, and Smashburger, as well as attempts by McDonald's and Wendy's to go more upscale. However, as many new fast casual entrants have found, opening new stores isn't necessarily a road to riches. Habit stock is trading near an all-time low, and Shake Shack reported a comparable sales decline last year.
Considering that level of competition, Chipotle's former ambitions to open hundreds of its own better-burger joints seem misguided as an attempt to fill a market that's already saturated.
2. New leadership is coming in
With new CEO Brian Niccol set to take the reins on Mar. 5, Chipotle would do best to eliminate unnecessary distractions for its new leader. The core burrito chain, with more than 2,300 locations, is much more deserving of his focus than a single burger outpost. Shutting down Tasty Made removes a potential distraction for new management and allows Chipotle to reallocate resources to rehabilitating the burrito chain, which is the best way for the company to revive its stock price.
3. The timing was never right
Chipotle got hammered by the 2015 E. coli crisis, which prompted a customer exodus that the burrito chain never really recovered from as comparable sales were down by as much 36% in the immediate aftermath of the crisis. While Chipotle was struggling to recover it lost sales, it still went ahead with the Tasty Made launch in Oct. 2016. Coming on the heels of Chipotle's announcement that it was pulling the plug on ShopHouse, Tasty Made seemed to hold promise. However, with challenges continuing in its core burrito chain, and Ells even admitting that many of the individual restaurants receive just "C" grades operationally, it's become clear that 100% of the company's focus needs to be on Chipotle itself, not secondary concepts.
Closing Tasty Made looks like one step to getting the company back on track.
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Jeremy Bowman owns shares of Chipotle Mexican Grill, Habit Restaurants, and Shake Shack. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool is short shares of Shake Shack. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.
