What the End of ShopHouse Means for Chipotle

By Markets Fool.com

A rice bowl from the now-defunct ShopHouse chain. Image source: ShopHouse.

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If you're a fan of curry and fast-casual dining,Chipotle(NYSE: CMG) has some bad news for you.The burrito roller is pulling the plug on ShopHouse, its Southeast Asian sister chain, five years after its inception.In the company's earnings call last week, Chipotle Founder Steve Ells said the concept has been unable to "demonstrate the ability to support an attractive unit economic model," and that the company would no longer invest in the brand, pursuing strategic alternatives instead.

The fate of the 15 ShopHouse locations in the Washington, D.C., Los Angeles, and Chicago areas remains unclear as Chipotle will either sell the franchise or close those stores. Some fans took toTwitterto express their disappointment over the decision, but with only 15 stores across the country, ShopHouse never reached a critical mass as a brand.

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Chipotle fully impaired the assets of ShopHouse, which was once speculated as a billion-dollar brand, taking a $14.5 million charge, and said it would focus instead on its two other growth concepts, the Pizzeria Locale pizza chain, and Tasty Made, its new burger joint that opened its first location last week. The closure of ShopHouse may help explain why the company launched Tasty Made, which, at the time,seemed like a surprising distraction.

Moving on

Though Ells and company have said many times that the Chipotle model -- sustainably sourced foods cooked by traditional methods and prepared in an assembly line -- could be repeated with a variety of cuisines, the death of ShopHouse may represent the death of an idea as much as the end of a restaurant chain.More than any other company, Chipotle deserves the credit for spawning the fast-casual boom.

The core idea behind the burrito chain was that food could be served quickly, but still be made from "real" ingredients using classic cooking methods. That idea has swept through the food industry over the last 20 years at all levels, changing everything from the way Cheerios are made to sparking dozens of imitators in the restaurant industry.

Consequently, competition in the industry is much tougher than it was a decade ago, as local and national chains have popped up around the country, catering to similar tastes as Chipotle. ShopHouse, with a unique menu of items like chicken satay and green curry, seemed like the company's best chance to catch lightning in a bottle twice, as putting such a cuisine in a fast-casual restaurant was a new idea.

Ells has said many times on the company's earnings calls that ShopHouse reminded him of the beginnings of Chipotle, with customer traffic and brand buzz building. So it's hard to say if ShopHouse's growth just plateaued much earlier than expected, or if management was spinning it positively in the hopes that it would reach its potential. Whatever the explanation, its failure casts doubt on the company's ability to develop future seed concepts, and is a disappointment for both investors and customers, especially at a time when the company is desperate for good news.

Betting on burgers and pizza

Chipotle's next-oldest seed concept is Pizzeria Locale. Unlike ShopHouse or Tasty Made, Chipotle did not start, nor does it fully own, the pizza chain. Instead, it describes itself as an investor in what is now seven Pizzeria Locale restaurants.

Chipotle took a stake in Pizzeria Locale in 2013, and partnered with the owners to launch its first fast-casual location in Chipotle's home in Denver, taking inspiration from Pizzeria Locale's full-service restaurant in nearby Boulder, opened by the original owners. Customers at Pizzeria Locale have their pizza assembled to order and then cooked in a high-temperature oven in less than two minutes. Since opening in Denver, Pizzeria Locale has spread to two new markets, Kansas City and Cincinnati, though management has been mum on future plans for the brand.

Tasty Made, Chipotle's new burger chain, attracted a crowd on opening day at its first location in Lancaster, Ohio, last Thursday. The company has not made much in the way of an official comment on Tasty Made, and no plans to open a second store are in the works currently, as management is likely testing out operating procedures and the menu.

Chipotle raised some eyebrows when news broke earlier this year that it would open a burger chain. The fast-casual burger space has gotten especially crowded in recent years with the likes of Five Guys, Smashburger,Shake Shack, andHabit Restaurant, all expanding rapidly. Success in that arena will not come easy.

Management continues to insist that the Chipotle model can be replicated with other foods, but with the closure of ShopHouse and the rising competition in the fast-casual industry, that contention has become harder to believe. The company's biggest concern continues to be overcoming the customer exodus following last year's E. coli outbreak, but a successful sister chain would offer a boon to the brand and a long-term growth path that investors are craving as the Chipotle brand matures. Five years after ShopHouse's first opening, there's still little evidence that Chipotle can repeat the smashing success of its original idea.

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Jeremy Bowman owns shares of Chipotle Mexican Grill, Habit Restaurants, and Shake Shack. The Motley Fool owns shares of and recommends 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.