Prediction: Chipotle stock will outperform Starbucks in the next 5 years

Brian Niccol, CEO Chipotle Mexican Grill (CMG 0.49%)leaving to occupy the same position at Starbucks (SBUX 1.72%) created waves in the market, with Starbucks shares rising and Chipotle shares falling. The immediate reaction was understandable. Starbucks had been in a rut and needed a shake-up, and Niccol had a very successful run at Chipotle.

However, now that the dust has settled, I predict that Chipotle stock will outperform Starbucks over the next five years in the restaurant space. Let’s see why I think this will be the case.

Starbucks’ problems will not be solved overnight

Niccol will have two big problems to deal with when he takes over Starbucks: lagging sales in the US and a weak Chinese market.

The first problem stems from a few issues. The first is that customers seem to have started to shrug off the high prices for Starbucks drinks. At the same time, they became frustrated with long wait times, which were caused in part by understaffing.

Before Niccol’s arrival, Starbucks tried to reduce wait times through technology and other efficiency efforts, though in doing so it lost some of the human touch of the Starbucks experience. While the obvious answer might be to add more baristas to its understaffed stores, that will come with additional costs.

However, China is a bigger problem for the company. The country is expected to be the biggest growth driver for the expansion, but its existing stores have struggled due to stiff competition and a lackluster Chinese consumer. Luckin coffee overtook Starbucks as the largest coffee shop in China last year, while a number of newer coffee shops such as Cotti Coffee have also emerged. The competition also greatly undercut Starbucks’ price.

Niccol does not have much experience in dealing with the Chinese market. It could disable the Chinese business, as Huh! trademarks made with Yum Chinabut this is more to push the problem aside than to solve it.

Image source: Getty Images.

Chipotle has better pricing power and expansion opportunities

One of the big differences between Chipotle and Starbucks lately is that Chipotle’s customers seem to see much more value in its offering and are much more willing to accept price increases in increments. This is seen in the same store sales of the two companies.

In the second quarter, Chipotle posted an 11.1% increase in same-store sales. Its prices were 3.3% higher than a year ago, but its traffic was still up 8.7%. For those doing the math, mix, which is the change in different items ordered, was down about 1%.

Chipotle consistently has a 2% to 3% price increase every year. However, it has made some larger menu price increases as a result of COVID-19, as well as recently in California due to new minimum wage laws. However, the company continued to see strong traffic at its restaurant locations despite the menu price increase.

Starbucks, on the other hand, has seen comparable-store sales in the U.S. struggle recently as customers push back on high prices. For the fiscal third quarter, US same-store sales were down 2%, traffic down 6%. It was similar to the previous quarter, with US same-store sales down 3%, with traffic down 7%. For many people, Starbucks is a small luxury and they indulge less because of the increased cost.

Chipotle also has a lot more expansion opportunities ahead compared to Starbucks. The coffee chain already has nearly 39,500 global locations, including more than 18,000 in North America. It is fairly saturated in the US, while it has mainly looked to a difficult Chinese market for new store growth.

In comparison, Chipotle had just over 3,500 store locations. It plans to open 285 to 315 new restaurants this year, so it’s still seeing significant, single-digit growth every year. The company has also barely scratched the surface when it comes to opportunities in the international market. Overall, it just has a much longer runway for growing new store openings compared to the larger Starbucks.

ratings

From a price-to-earnings (P/E) perspective, Starbucks is the cheaper stock. However, Chipotle has grown its earnings at a much faster pace this year, and the opportunities for expansion in front of it are much greater.

Data on CMG PE ratio (forward 1y) by YCharts.

While I think both stocks can be winners over the next five years, my bet is on the company with the best opportunities for expansion and same-store sales growth. At this point, that’s clearly Chipotle, and losing its CEO to Starbucks doesn’t change that.