When It Comes To New Concepts, Chipotle Could Use A History Lesson

By Markets Fool.com

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A strange year forChipotle Mexican Grill(NYSE: CMG) just got even stranger.

At a time when sales are plummeting due to last year's series of foodborne illness outbreaks, the burrito chain announced it would open its fourth concept this fall, kicking off the Tasty Made burger chain in Lancaster, Ohio.

Rumors had been circulating through the media since the company filed to trademark the phrase "better burger" earlier this year, signaling that it may launch its third seed concept, joining ShopHouse Southeast Asian Kitchen and Pizzeria Locale. Chipotle Founder and Co-CEO Steve Ells explained the move, echoing remarks he's made in the past."Chipotle has been focused on a long-term vision to change the way people think about and eat fast food.At the heart of that is our commitment to great qualityingredients and classic cooking techniques -- traits that are absolutely necessary to make the best tasting food,and that can be applied to number of kinds of cuisine."

The Tasty Made menu will feature only burgers, fries, and shakes, as Ells seems to be taking inspiration from the classic burger joints of the 1950s, which were essentially the first fast food restaurants. Like Chipotle, Tasty Made will use all-natural, high-quality ingredients "that are grownand raised with respect for theanimals, the land, and the farmers who produce them."

More doesn't always equal better

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Chipotle management has stressed that it believes the company's assembly line model can be applied to different cuisines aside from Mexican. That is true, but just because it can work with different foods doesn't mean it's in the company's best interest to do so, as taking the focus from its core concept could do more harm than good. Plenty of bigger fast-food companies have already learned that lesson.

McDonald's(NYSE: MCD), for example, was once Chipotle's majority shareholder, but spun off the burrito chain in 2006 to focus on brand McDonald's.

While McDonald's has been criticized for the move, as Chipotle stock today is worth nearly 20 times its IPO price, it's hard to argue with the Golden Arches strategy of avoiding secondary restaurant concepts. Today, McDonald's has over 36,000 restaurants, more than 18 times that of Chipotle, and it's the most valuable restaurant company in the world. Since the spinoff, McDonald's stock has trounced theS&P 500, more than tripling in value over the last ten years. Though Chipotle stock has outperformed McDonald's, Mickey D's has created much more value than Chipotle has in that time.

Starbucks(NASDAQ: SBUX), the world's second most valuable restaurant company, offers a similar example. Over its history, Starbucks has shown an interest in outside concepts, but none of them have panned out. In 2012, it bought the San Francisco bakery La Boulange, promising to expand it, but instead shuttered all 23 locations just a few years later. It acquired Teavana with an eye on launching a chain of tea bars, but instead converted most of them to Starbucks earlier this year, leaving just one open.

The company had similar hopes for an Evolution fresh juice chain, but that never materialized either.

This pattern of going it alone is repeated across the restaurant industry. Subway, with over 40,000 locations worldwide, is more ubiquitous than any other restaurant, yet it never felt the need to diversify into a second brand.Wendy's was once tied up with Arby's and Tim Horton's, but is now independent.

Some companies have found success with two or three concepts, such asYum! Brands(NYSE: YUM), which counts KFC, Taco Bell, and Pizza Hut under its umbrella -- but even that company decided to spin off its China business this year, effectively splitting the company in two. It once owned Long John Silver's and A&W, but sold those in 2011 to focus on international growth.

Too many cooks in the kitchen

There's a reason why companies like McDonald's and Starbucks have avoided secondary concepts. The two are among the most recognized brands on the planet. The investment necessary to bring the concept to that level is just not sustainable, and doesn't make sense when they can spend that money on building more McDonald's and Starbucks stores and investing in their core brands.

Chipotle may be in a similar position. Before the E coli scare, the company was ringing up average unit volumes of $2.5 million, equal to McDonald's and behind only Chick-Fil-A among major fast food chains. Getting to that sales level took more than 20 years, and it might not be able to do it with another concept.

The brand may be currently tarnished due to the current food safety concerns, but its restoration is much more important than any new restaurant concept. Five years after the first ShopHouse opened, Chipotle-brand restaurants still make up more than 99% of the company's locations. With more than 2,000 Chipotle locations operating, the company would need at least 200 of one of its other concepts to have a meaningful impact on its financial results, and Chipotle's disinterest in franchising makes a rapid ramp-up out of the question.

While customers may enjoy Chipotle's take on the burger, for now, Tasty Made looks like little more than a distraction from its core business.

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Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. 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.