Tuesday, July 24, 2012

Is Taco Bell Outsmarting Chipotle? Jim Cramer Thinks So

What is going on? I happened to be flipping thru the channels last night when I came upon Mad Money, and Jim Cramer was holding up a giant piece of aluminum that was supposed to be a Chipotle Burrito. I'll say that I don't watch the show, but when talk turns to food my interests are peaked. Cramer was explaining that during the last quarter Chipotle's stock had taken a tumble, and not just any tumble, he seemed to think that it was the start of a trend. The end of Chipotle? Not likely. The end to an overvalued stock? Yes. So what does that mean exactly?

We've seen this before with Starbucks. Tremendous growth, stores opening on every corner. Guess what happens...cannibalization of their own brand. Chipotle is no different. Too many restaurants in too many markets is a big part of the problem, but that's not the whole story. Chipotle sees itself, as do I, as a high quality product with high standards, and due to the rise in costs over the past couple of years they've had to increase menu pricing. Combine that with a down economy and you get a $300 million dollar loss in company value. It's not all bad news however. Chipotle has still seen growth in the last quarter, just not where it was just a few years ago.

This is where Taco Bell comes in, sitting there with it's inferior product and bombarding us with advertisements about how cheap they are. You see they have no high standards to uphold. They don't worry about giving you the quality you have been demanding over the last few years. They know that at the end of the day people want to spend less on their food because they feel they have less in their pockets. Chipotle can't compete in that arena. They have to continue to uphold their standards and press their customers with the belief that they offer the best possible product.

Is this the end? Of course not, but it continues a trend of overvaluing companies that explode with growth. The company still expects to open 150-160 stores by the time this year comes to an end, plus the continued plans of foreign expansion will keep them profitable for a long time to come.

Don't worry, those delicious Burrito's aren't going anywhere. However in time we are bound to see a few less Chipotle's than we are used too.

1 comment:

  1. Bring back the illegals! They work for practically nothing and don't need breaks or medical care. Cheap labor = cheap food!!