Why Chipotle Mexican Grill, Inc. Will Eat McDonald's Corporation's Lunch

By Markets Fool.com

Image by Flickr user Aranami; reproduced under Creative Commons license.

Continue Reading Below

Fast-casual restaurants are transforming the quick-service space in a way that had not been anticipated just 15 years ago. Chipotle Mexican Grill is the poster child of the growing fast-casual market segment, while McDonald's typifies the old-line fast-food chains that are now struggling for growth. McDonald's is trying all manner of things to mimic its new peers. Can McDonald's reinvent itself to be more like Chipotle, or will Chipotle continue running circles around the fast-food establishment for years to come?

A clear trend
There is a clear trend that suggests Chipotle and McDonald's are playing something close to a zero-sum game for customers. U.S. bar and restaurant sales grew just 2.9% in 2014, according to Technomic. After inflation, restaurants are fighting for a larger slice of a fixed pie.

Moreover, Chipotle is clearly winning the struggle for customers. Chipotle's same-store sales grew 16.8% in 2014, compared with 1% for McDonald's global store base and a 1.7% decline in U.S. same-store sales during the fourth quarter.

This suggests that customers like what Chipotle is offering a lot more than they like what McDonald's has to offer. Finding out why customers hold different opinions of the two chains is key to understanding which company has the better long-term future.

Fresh food at a fair price
Millennials' tastes are driving much of the change in the quick-service restaurant industry. Members of the cohort that are now 20 to 35 years old spend a higher percentage of their food budget away from home than any other age group, according to QSR Magazine, and will account for more than half the U.S. population by 2030. It's thus an incredibly influential demographic in the food-service industry.

Continue Reading Below

Increasingly, health-conscious millennials want fresh food with high-quality ingredients served quickly at a fair price. Chipotle's "Food With Integrity" motto speaks directly to the emerging demographic base. Its wide offering of sustainably raised food without the use of synthetic hormones, combined with a transparent and efficient food-prep line, satisfies customers' desire for freshness, variety, and speed.

Although Chipotle's track record on sourcing humanely raised meat isn't perfect, the company has a history of putting product before profit. In January, the company stopped buying from a major pork supplier after learning that it didn't adhere to Chipotle's animal-welfare standards. This decision led to a lack of carnitas in one-third of Chipotle's stores. These kinds of actions play strongly to Chipotle's core customer, bolstering its reputation among millennials who care about where their food comes from.

McDonald's is playing catch-up
Meanwhile, McDonald's is treading water as it tries to adjust its own formula to match changing consumer preferences. A sporadic effort to mimic the emerging competition has yielded mixed results thus far.

For instance, McDonald's increased customer choice by introducing Create Your Taste, which allows customers to skip the line and order a customized burger choosing from a range of 30 ingredients. At the same time, McDonald's removed choice by shrinking its menu to lessen the strain on kitchen staff and speed up service. This move may ultimately lead to a streamlined kitchen that offers Chipotle-like customization, but the effect on sales remains to be seen.

Even if McDonald's can increase variety, its menu will still be dogged by the use of frozen food containing preservatives and other unhealthy ingredients -- the exact opposite of where the market is heading. McDonald's has introduced salads, wraps, and other healthy fare in the past, but it will take years -- maybe even decades -- to change consumers' perceptions of the company.

McDonald's may be stuck in the slow lane for quite a bit longer. Even if it is able to change its model to mimic fast-casual restaurants, McDonald's has an image problem that could take decades to reverse. That's the downside of a strong brand: While Chipotle is currently the poster child for all that's right in the food world, McDonald's carries the banner for all that's wrong with it. This difference in image may be the determining factor in the war between fast casual and fast food in the 21st century.

The article Why Chipotle Mexican Grill, Inc. Will Eat McDonald's Corporation's Lunch originally appeared on Fool.com.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.