Feel like a pumpkin-spice burrito? Analysts try to wrap their heads around a possible Starbucks-Chipotle tie-up.

By Bill Peters

'We think investors will view this as competing for management's time and attention where there's still wood to chop on turning the Starbucks brand around,' analyst says

The Financial Times reported on Thursday that Starbucks had explored a possible takeover of Chipotle Mexican Grill.

A hot cup of coffee might be among the last things you think of when you order a burrito. But as Starbucks reportedly weighs a takeover of Chipotle Mexican Grill, you could end up getting both from one massive, taco-pumpkin-spice-latte conglomerate.

The Financial Times on Thursday reported that the coffee chain has explored acquiring Chipotle in some form, in what would be the biggest such deal in the restaurant industry's history. If that doesn't immediately make sense to you, Wall Street appears to agree.

Analysts say the deal would be tough to pull off, given the chains' sizes and current struggles. They noted that while Starbucks (SBUX) CEO Brian Niccol once led a turnaround at Chipotle (CMG), managing two different restaurant chains might be too much for one CEO.

"I think it's a risky proposition for Starbucks, given that they are in the middle of a turnaround effort that is seemingly going well," Seaport Research analyst Eric Gonzalez said.

He also noted that Scott Boatwright, Chipotle's current CEO, was once Niccol's underling. Boatwright worked under Niccol while Chipotle was trying to rebuild its reputation and bottom line following a food-safety scare during the prior decade.

"The question I have is when you have a CEO of Starbucks who is very familiar with Chipotle, what is he seeing at Chipotle where he's saying to himself 'I can do this better?'" Gonzalez said.

William Blair analyst Sharon Zackfia also noted that as of the end of June, Starbucks already had around $9.4 billion in net debt.

And Brian Mulberry, chief market strategist at Zacks Investment Management, told MarketWatch that absorbing Chipotle would likely require hefty financing at a time when bond yields have risen sharply.

"The problem is that Starbucks itself is still in recovery mode, and I am not certain adding more debt to finance this deal would be well-accepted by investors right now," he said over email.

Other analysts had questions about the prospect of Niccol, who joined Starbucks as CEO in 2024, becoming something of an Elon Musk of restaurant CEOs. RBC analyst Logan Reich, in a note on Thursday, said the rationale behind a combined Starbucks-Chipotle "isn't apparent to us given limited overlap between the businesses."

"For [Starbucks], we think investors will view this as competing for management's time and attention where there's still wood to chop on turning the Starbucks brand around," particularly in North America, he said.

The Financial Times said Starbucks has collaborated with advisers on a Chipotle takeover proposal. Further details about any deal were unclear. Sources cited by FT noted that a deal might never happen.

Starbucks declined to comment. Chipotle did not immediately respond to requests for comment.

Shares of Starbucks closed 0.4% lower on Thursday. However, Chipotle's stock rallied 6.2%. Starbucks ended the day with a market value of $106.26 billion, compared with Chipotle's value of $41.35 billion, according to FactSet data.

Starbucks' stock is still up 10.7% so far this year, as the coffee chain tries to revive sales with more welcoming coffee shops and new drinks. Chipotle shares, meanwhile, have fallen 11.7% over that period, amid a bigger fast-casual slump and a malaise over pricier "slop bowls" that have become a staple in that segment of the restaurant industry.

The restaurant industry has struggled in recent years, after menu-price increases earlier in the decade - in part a response to supply and job-market disruptions due to the pandemic - scared customers away. More restaurants have tried to lure consumers back with discounts and other deals.

William Blair's Zackfia said in a research note that there were "no obvious revenue synergies" between Starbucks and Chipotle. But she did say Niccol's in-depth knowledge of Chipotle could benefit the chain during a tough time. Shares of Chipotle, she noted, had fallen around 35% since the news of Niccol's move to Starbucks.

She also said that the two chains might be able to work together in more ways than one might initially think. Starbucks Energy Refreshers drinks, which are served cold, could be served up with a burrito bowl in the afternoon or evening at Chipotle, for instance, she said.

"That's easier to view as a potential reality than, say, burritos in Starbucks," Zackfia said. Similarly, she said, Chipotle, was unlikely to be open in the morning serving coffee.

Still, Starbucks has made a name for itself with customizable beverages. Handling personalized drinks, along with burritos and bowls, could make things complicated in Chipotle's kitchens, Zackfia said, depending on how far down that road Chipotle might go. She also said that Chipotle and Starbucks have different supply chains, with different ingredients.

There were some analysts that actually had positive takes on a potential merger. Stephens analyst Jim Salera, in a research note on Thursday, said that while executing on any deal could get messy, around 90% of U.S. Chipotles were located within one mile of a Starbucks, "suggesting meaningful opportunities for shared real-estate development and potentially operating efficiencies." He said there was enough overlap between customers that their data could feed into a robust loyalty program.

Then again, Gonzalez noted that in Seaport's 15 years covering the restaurant industry, mergers and acquisitions weren't a guaranteed cure for companies' woes.

He said that technology hasn't taken over restaurants the way it has in other industries, making it tougher to sync up operations. Keeping customers happy on a day-to-day basis in one restaurant is difficult on its own.

"If you have to do that across multiple brands, then it becomes difficult for one management team to stay focused on that," he said.

-Bill Peters

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(END) Dow Jones Newswires

10-08-26 1707ET