Round Up: Chipotle vs. Taco Bell Edition

by JT McGee

I got all kinds of stuff to read this week, people.

Stuff I wrote Elsewhere

Chipotle vs. Taco Bell

Last week’s round up had a blurb about stocks I would own if they were cheaper. Chipotle Mexican Grill was that one stock.

Fast forward one week, and it’s cheaper. Chipotle got “Einhorned” by well-known short-seller David Einhorn. At the Value Investing Congress, Einhorn made the case that Chipotle was overvalued. He also listed Taco Bell’s new menu as a competitive threat to Chipotle.

I think Taco Bell is a marginal threat, kind of in the same way McDonald’s coffee was a “threat” to Starbucks. Obviously Chipotle is tethered to a few products, which Taco Bell is copying and making cheaper. Seeing as a menu expansion by Taco Bell requires absolutely no new fixed costs, Taco Bell can compete with Chipotle and sell at a much lower cost. This is the value investing perspective here. All economics, yo! Einhorn’s research reveals 75% of people who eat at Chipotle also eat at Taco Bell. That would be convincing, but I would imagine that people who go to Starbucks also eat at McDonald’s.

Of course I still can’t get over my own perception of the two companies. Taco Bell is a place drunk people eat because they feel invincible. Chipotle is the place hungover people eat to feel better. There is a marked different in the product here – not just the tangible product, but the feeling you get from consuming the product. I know of few people who go to Taco Bell by choice. Usually, it’s a matter of convenience, price, or the fact it’s open late. In short, it’s a different provider than Chipotle, which has its loyal fans (including me.)

Luckily for me, Chipotle is an investment I have to pass on based solely on valuation, not competitive threats. Therefore, I get to watch competitive forces play out while I wait for Chipotle to become an investment with a sizable margin of safety.

Food fans: Taco Bell vs. Chipotle? Are they really competitors?

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