Chipotle: First International Agreement Intriguing but Unlikely to Move the Financial Needle

We don’t expect wide-moat Chipotle Mexican Grill’s CMG first international development agreement to prove financially material, and we continue to view the shares as pricey. Nevertheless, we appreciate the strategic rationale behind the deal with Alshaya Group and will keep a close eye on its success; reasonable uptake in the Middle East and Africa could augur well for a deeper foray into larger and more strategically important markets in Western Europe while increasing the chances of entry into markets like China that global restaurant peers have traditionally approached through franchise agreements.

To date, Chipotle has been one of the largest chains with an exclusively company-owned restaurant footprint, boasting some of the best four-wall economics in our U.S. restaurant coverage, including restaurant margins in the high 20s and roughly three-year cash payback periods. The move toward franchising abroad is an interesting one, coming as the chain starts to focus more clearly on international expansion, perhaps the one area where its growth has disappointed investors. Chipotle has managed to open just 16 international stores over the past five years (taking its international restaurant count to 53 units) and has struggled to generate meaningful traction in Canada, the United Kingdom, France, and Germany. We view the agreement as a natural extension of its business model, with partner Alshaya representing the premier franchise operator in the Middle East and North Africa.

It’s difficult to discern a true market size in the region, particularly since the original agreement only covers Dubai and Kuwait (for context, Alshaya operates Starbucks stores in 13 countries in the region with a combined population of 335 million, per World Bank data). However, we estimate a regional addressable market size in the ballpark of 1,100 stores and $1.5 billion in systemwide sales based on total population and per capita restaurant penetration.