By Pallavi Gogoi When McDonalds (MCD) decided to take a tiny stake in Chipotle Mexican Grill, an 18-restaurant chain based in Denver, most Americans had never heard of the upstart outfit. That was 1998.
Over the years, McDonald's increased its holding to 90%, and Chipotle's growth has been hotter than its fiery salsa. Many Americans who have sampled Chipotle's fare rave about the chain, which has 460 restaurants spread across 22 states. Chipotle won't reveal its same-store sales, except to say it has seen double-digit growth for each of the past eight years. Restaurant trade magazine QSR figures that Chipotle saw 43% sales growth in 2004, to $480 million.
SMALL FRY. On Sept. 21, McDonald's announced that it would spin off a minority stake with a Chipotle IPO. Neither Chipotle nor McDonald's would give the size of the investment that McDonald's has made, but analysts believe that an IPO would raise at least $1 billion.
So, if Chipotle is that hot, why does McDonald's want to sell a portion of it? Because the burger behemoth is too busy focusing on its own kitchen, intent on maintaining the growth momentum of the last couple of years. Says McDonald's CEO Jim Skinner: "We believe this action will highlight Chipotle's performance and unique characteristics, which are currently overshadowed by the larger McDonald's global business."
Indeed, even if Chipotle were to more than double in size, to 1,000 restaurants, it would still be a drop in the bucket for McDonald's, whose 30,000 restaurants worldwide have revenues of some $19 billion.
GRAVY TRAIN. Also, Chipotle has always functioned independently of McDonald's, never tapping the parent outfit's management too deeply. Instead it has used McDonald's wide distribution network, while continuing to develop meals featuring organic vegetables and chicken, pork, and beef raised without antibiotics or hormones.
That culinary formula and McDonald's support has worked well for Chipotle, whose number of outlets "have definitely grown at a rate that is faster than our own revenue growth" would have allowed, says Chipotle spokesman Chris Arnold, who adds "McDonald's support was essential."
Clearly, McDonald's sees the value in its investment -- the reason it will continue holding a piece of the outfit. But it also makes financial sense for the parent to cash in -- and use the IPO proceeds to expand its own business.
PERFECT TIMING. Chipotle's journey has been inspiring. When CEO Steve Ells founded the outfit in 1993 in Denver, he aimed to offer fast-food burritos featuring fresh ingredients and gourmet cooking techniques. It wasn't rocket science, but the concept took off.
Critics were soon raving and customers lining up. The timing also was right, as Chipotle was expanding at a time when Hispanics had become the largest minority in the U.S. and Mexican food was going mainstream.
While McDonald's got to ride the first part of Chipotle's growth journey, it will be investors' turn to get on the bandwagon in the early part of next year. Given the long lines at the New York City Chipotle in Midtown Manhattan, it may well be that the IPO will whet quite a few appetites.
Gogoi is a reporter for BusinessWeek Online in New York