The recent departure of Brian Niccol, CEO of Chipotle Mexican Grill (NYSE: CMG), to lead Starbucks (NASDAQ: SBUX) has caused notable shifts in the stock market. Starbucks‘ stock surged, while Chipotle’s experienced a decline. This reaction was understandable, given Niccol’s successful tenure at Chipotle and Starbucks’ need for revitalization. However, with the initial excitement fading, I predict that Chipotle’s stock will outperform Starbucks over the next five years. Here’s why.
Starbucks Faces Significant Challenges
Brian Niccol will confront two major issues at Starbucks: sluggish U.S. sales and a struggling Chinese market.
In the U.S., Starbucks faces resistance from customers who are unhappy with the high prices and long wait times, exacerbated by staffing shortages. Efforts to streamline operations through technology have not fully compensated for the reduced personal touch, and increasing staff could further escalate costs.
The situation in China is even more challenging. The country was expected to drive significant expansion, but Starbucks’ existing outlets are suffering from intense competition and a weak consumer base. Last year, Luckin Coffee surpassed Starbucks as China’s largest coffee chain, with newer competitors like Cotti Coffee offering lower prices and further pressuring Starbucks.
Niccol’s limited experience with the Chinese market might not be sufficient to address these issues effectively. While spinning off the Chinese business, as Yum! Brands did with Yum China, could be an option, it might only shift the problem rather than solve it.
Chipotle’s Advantage: Pricing Power And Expansion Potential
In contrast, Chipotle appears to be in a stronger position. Customers see significant value in Chipotle’s offerings and are more receptive to price increases. This is reflected in the company’s performance. In the second quarter, Chipotle reported an 11.1% rise in same-store sales. Despite a 3.3% increase in prices from the previous year, traffic rose by 8.7%. Although there was a slight decline in the mix of items ordered, overall performance remained robust.
Chipotle has consistently implemented annual price hikes of 2% to 3% and has managed to maintain strong customer traffic even with larger increases post-COVID-19 and due to new wage laws in California.
Conversely, Starbucks has struggled with declining U.S. same-store sales. In its fiscal Q3, U.S. same-store sales fell by 2%, with traffic down 6%. The previous quarter also saw declines, with a 3% drop in sales and a 7% decrease in traffic. Rising costs have led many to cut back on what they perceive as a luxury.
Expansion Opportunities: Chipotle Vs. Starbucks
Chipotle also has more room for expansion compared to Starbucks. Starbucks already operates nearly 39,500 locations globally, with over 18,000 in North America. The U.S. market is nearing saturation, and growth prospects in China remain uncertain.
In contrast, Chipotle has just over 3,500 locations and plans to open 285 to 315 new restaurants this year. The company is still in the early stages of exploring international markets, providing it with a longer runway for growth compared to Starbucks.
In summary, while Starbucks faces significant hurdles, particularly under Niccol’s leadership, Chipotle’s stronger customer value perception, consistent sales growth, and expansion potential suggest that its stock will likely outperform Starbucks over the next five years.