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Chipotle to Close All ShopHouse Restaurants: What's Next?

YUM CMG JACK EAT

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According to a recent report by Nation's Restaurant News, quick-casual and fresh Mexican food restaurant chains operator Chipotle Mexican Grill, Inc. (CMG - Free Report) plans to close all 15 of its ShopHouse Southeast Asian Kitchen restaurants, effective Mar 17.

Reportedly, the company has also entered into a deal to sell the leases for each of the ShopHouse locations. Meanwhile, it will offer employment and one-week payment beyond closing to ShopHouse workers as they transition to new positions.

Notably, ShopHouse restaurants first opened in 2011 and served fast casual, Asian cuisine.

Rationale Behind

Chipotle’s move of closing all ShopHouse restaurants comes as its bid to recover from the massive food safety scandal related to the E. coli and norovirus outbreak which surfaced toward the end of 2015. As a safety measure, the fast casual chain was forced to close several outlets. Although these were reopened later with fresh ingredients, and extensive cleaning and sanitizing activities, the incidents dealt a severe blow to Chipotle’s sales and reputation.

Notably, the company’s earnings and revenues have been under tremendous pressure since then. In fact, comps witnessed a decline of 20.4% in full-year 2016.

Interestingly, at the third-quarter 2016 earnings conference call, management had announced that they planned to cease expansion of the fast-casual Asian Kitchen concept and were looking to pursue “strategic alternatives” for the brand. The announcement came after the ShopHouse brand failed to meet sales expectations and did not demonstrate the ability to support "an attractive unit economic model."

The Road Ahead

Chipotle is leaving no stone unturned to reinvigorate investors’ confidence and regain its footing. In this regard, its board of directors recently discarded the co-CEO model and made Steve Ells the company’s sole CEO in order to deal with the ongoing challenges in a better way. Ells particularly aims to focus on simplifying restaurant operations so as to offer better service and healthier food to attract customers.

Further, the company added four new members to rejuvenate its board. In addition, the undertaken sales and technology driven initiatives should aid in bringing back customers.

However, Chipotle’s market share, particularly in the Mexican cuisine category, is unlikely to increase soon as the company already reached 60% saturation in the U.S. Also, it is currently facing increased competition from the likes of Yum! Brands, Inc. (YUM - Free Report) owned Taco Bell, Jack in the Box Inc.’s (JACK - Free Report) subsidiary Qdoba and Brinker International Inc.‘s (EAT - Free Report) Chili’s Grill & Bar (Chili’s). This is lowering the brand’s ability to recover and return to its peak levels of 2014, as smoothly and quickly as expected.

Nevertheless, various initiatives undertaken by the company clearly reflect that Chipotle is indeed on the road to recovery. It even expects sales to rise in the high-single digits at established locations in 2017. Moreover, the latest move of shutting down all ShopHouse restaurants also bodes well as the brand failed to be a viable growth strategy for the company.

Still, we believe, it will take some time for the company to completely restore its economic model as well as customers’ trust and return to its former glory.

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