Chipotle Becomes the New Starbucks as It Closes Stores

Closing retail locations is bad news, particularly in the fast-food business. It is a signal that management put stores where they should not have been and now has too many. Chipotle Mexican Grill Inc. (NYSE: CMG) announced it would close some locations. Although this came in the midst of what it called positive news, it really isn’t. Investors get reminded of the recent retrenching of Starbucks Corp. (NASDAQ: SBUX), another struggling fast-food operator.

Brian Niccol, chief executive officer, said that although the stores would close, sales may eventually double. It is an audacious claim by the leader of a restaurant chain that is, like Starbucks, besieged by competition. He commented:

I can easily see a future where Chipotle more than doubles the business to $10 billion in revenue. We will execute flawlessly in our existing restaurants, add more high-performing restaurants, build brand relevance and engagement, expand digital capabilities for team members and customers, and build an organization with top tier talent that can win today and cultivate a better future.

These comments were followed by details of the downsizing:

The restructuring to execute on the strategy will require changes to the organization and to the culture, which will result in non-recurring charges during the second quarter, and over the next several quarters. These non-recurring costs primarily relate to the moving of offices, the restructuring of the organization, and closing underperforming restaurants. In aggregate, Chipotle expects these costs, together with a small amount of other unusual items, to be in the range of $115 million to $135 million.

While Starbucks sells coffee and Chipotle sells Mexican food, both are up against a larger and more clever competitor in McDonald’s Corp. (NYSE: MCD). It has done a good job of elbowing into the breakfast business. It is still the overall favorite among fast-food companies. Chipotle meanwhile still has to struggle with Taco Bell, which Harris recently named America’s best Mexican restaurant. One theory is that a series of food poisonings undermined Chipotle’s image.

Starbucks and Chipotle each may have reached a point of saturation in the United States. Chipotle’s comparable store sales increased only 2.2% last quarter, a sign that demand has flagged. In the most recent Starbucks quarter, comparable store sales in the United States and the Americas rose 2.0%. Like Chipotle, after weak earnings, Starbucks management announced some new initiatives to “streamline” and “optimize.”

Chipotle has become a very slow-growing fast-food company, and one is that very like Starbucks.