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If you own shares of Chipotle stock, get out while you still can!

Updated on November 27, 2012

Chipotle will try to make the magic happen again, with ShopHouse

Chipotle (NYSE: CMG) is a huge recent restaurant success story. Their share price explosion reflects their success as a company since going public in 2006. Recently they have announced their new business venture: ShopHouse. Some sort of Asian-American version of Chipotle's Mexican-American fast casual restaurant will open and begin to attempt a replication of the success of one of America's favorite recent burrito venders. This, as an investor, is a sign of doom. Restaurants are a tough, competitive business to be in. A magic explosion of profits and quality is a lightning strike, and not something easily done again. The arrogance of any business leader assuming that they can expand into a brand new line of business like this astonishes me. A better solution would have been to pick up a regional brand to go national, or to stick with doing what they do best and accepting that there will be no more explosive growth.

Chipotle reminds me a lot of the sort of restaurants I loved in San Francisco. A clean, classy, small storefront, where I can walk in and order a delicious, huge burrito any time of day or night, and I'm back on the street in under fifteen minutes to catch a train. Recreating this same idea in other styles of food is not the sort of thing that is uncommon. Fast casual restaurants like Panda Express, and Five Guys Burger and Fries, and Freebird World Burrito all push hard against the pocketbooks and retail space of our shopping malls. Locally-owned and operated restaurants have kept this model alive and thriving for decades. How much room is there for a new, large player?

What exactly is a ShopHouse?

Imagine a Panda Express. Except in this Panda Express, the company is owned and managed by Chipotle. This is a ShopHouse, simplified. Doesn't this sort of sound like a waste of time? When Chipotle exploded on the scene, it was because there was no major burrito player in the burger-and-starbucks-dominated retail complexes of the country. Health-conscious consumers had Panera Bread, maybe, if they were in a fancy enough neighborhood. The explosion of fast casual dining across the country followed an explosion of construction, as well, that used the recent economic boom of the second Clinton administration to push houses and retail shopping malls outward, ever outward, where there was a construction boom to support the rise of a new brand, in areas that lacked the established local businesses to support the new housing growth.

What exactly is a ShopHouse in a world where people can't afford to build new houses? A latecomer to a crowded field, without any sort of innovation beyond whatever supply-chain logistics already support Chipotle.

Time to sell Chipotle

If you own shares of Chipotle, particularly if you followed their meteoric rise, I'm very happy for you. But, it is time to prepare for your exit from ownership of this stock. The ShopHouse is the sort of foolish venture that will sink a company's value long before any sort of dividend can be offered. What's worse about this venture is it signals a corporate culture that would rather gamble with a whole new line of business than return the rewards to shareholders of the very successful company created. To me, that's the difference between owning shares of Starbucks (SBUX) which focused solely on not only transforming the coffee experience of America, but on pushing back competition through innovation inside their existing retail stores and a quality dividend policy, and owning shares of money-losing gamblers like Brinker International (NYSE: EAT) that have failed as many, if not more times, than they have succeeded with their restaurant chains and still fail to innovate in the few successful businesses they maintain, allowing their marketshare to be chipped away. (Chili's is famous, after all, for ideas that it stole from other restaurants -- Bloomin' Onion, Fajitas, Margaritas -- instead of ideas it came up with by itself! Starbucks is famous for whole product lines it created independently, like Frapuccinos and Pumpkin Spice Lattes!)


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