Chipotle vs McDonald's
*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.
Here's the podcast episode for this post
Chipotle and McDonald's, two restaurants that are wildly successful in the fierce restaurant industry. While McDonald's is the king of fast food, Chipotle is the king of fast-casual dining. Both of these names get compared together often. While many investors might like McDonald's for the stability and dividend, other investors like Chipotle for its high growth.
Interestingly, at one point in time, McDonald's was once an investor of Chipotle but later dumped its stake.
Let's take a dive and compare the two businesses. For this comparison, we'll be using a Motley Fool article that's a few years old. Because the nature of their businesses hasn't changed much since the time of writing, we at Dissecting the Markets feel that it still provides an accurate picture among the two companies.
And regarding the McDonald's restaurants, we're talking about the stores being corporate-owned since all of Chipotle's locations are corporate-owned.
Comparison (from a restaurant owner's perspective)
Profit per restaurant
Chipotle restaurants made $250K in profit per restaurant. Meanwhile, an average McDonald's restaurant made $131K in profit per location.
Restaurant-Level Operating Margins
Chipotle's restaurant-owned operating margins were 27.2% while McDonald's profit margins were 15.9%.
The reason for that big difference is because of pricing power. Because Chipotle uses higher quality ingredients, they're able to charge higher prices for their food. Meanwhile, because McDonald's provides itself with most of the raw materials and reaps significant synergies from their strong supply chain, they've been able to reduce costs by a larger amount.
Overall Difference
Looking at both companies from an investor's perspective and not a restaurant owner's perspective, the big difference there is that most of McDonald's locations are owned and run by franchisees while all of Chipotle's locations are owned by the company itself.
There are many benefits to being McDonald's. One big difference is that McDonald's get to make money from being their franchisee's landlord and provider of the brand, logo, and intellectual property. This allows McDonald's to only focus on services that help franchisees make sales without worry about many of the individual locations. Also, McDonald's doesn't need to take on a lot of debt to fund the development of a new location as the franchisees would provide a lot of capital to fund it.
Meanwhile, there are benefits to being Chipotle. Owning all the stores allows you to take control of the customer experience and implement changes faster. Also, because you don't have franchisees running your stores, you'll be able to reap all of the money that your restaurants have made and lost, which helps boost (or reduce) margins in a bigger way.
If I were to choose...
I'll be honest, it's very to choose between Chipotle and McDonald's. Both are the strongest in their niche in the restaurant industry. While Chipotle does provide better numbers, if ever a recession comes, I'm afraid that Chipotle sales will tank by a big amount while McDonald's sales might not be affected or even increase.
From an investor's perspective, even if Chipotle provides higher growth and higher margins in the industry, McDonald's would be the company I'd invest in mainly because Chiptole's stock is really expensive. With a PE of 88, it seems like investors are still pricing in high growth rates for the company even if the pandemic has caused many people's finances to turn dire. Plus, I'm not even sure how long the economic recovery would take.
In the end, I'd rather invest in McDonald's.
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