Somewhat competitors by no means stopped Chipotle.
Up over 200% in 2024, restaurant firm Cava Group (CAVA 0.78%) is among the hottest shares on the whole inventory market, and for good purpose. Its income was up a shocking 35% 12 months over 12 months within the second quarter of 2024, and its internet revenue soared 200% to $20 million. Furthermore, with solely 341 places on the finish of the quarter, this little restaurant firm might have many extra years of worthwhile progress forward. No marvel traders are thrilled.
Cava is a restaurant chain specializing in Mediterranean delicacies. As an alternative of french fries, the corporate serves up pita chips. Different chains use cheddar cheese, and Cava has feta. And as an alternative of meatballs product of floor beef, this chain makes use of lamb. All of this offers Cava a differentiated nook of the restaurant market.
Cava seems to have little competitors on the subject of Mediterranean meals and, consequently, a transparent path for progress. Virtually no one is aware of about an Ohio restaurant chain referred to as Brassica. The substances on Brassica’s menu have a variety of overlap with Cava. Nevertheless, contemplating it solely has six eating places, traders may very well be forgiven for ignoring it.
Sadly for Cava’s shareholders, Brassica is instantly within the highlight. One of many prime restaurant corporations on this planet is Chipotle Mexican Grill (CMG 0.90%), and it simply invested on this small Cava rival. Here is what it means and doesn’t suggest for traders.
What’s Chipotle doing?
In 2022, Chipotle launched a enterprise capital fund. The fund had a $50 million pool for investing in start-up corporations. Since launching, the corporate has made a number of investments and doubled its funding pool to $100 million in February.
In response to the press releases, Chipotle’s fund seeks to put money into “provide chain, agriculture, restaurant innovation, automation, and different areas that help Chipotle’s mission.” And that is precisely what the corporate has performed. For instance, it beforehand invested in Native Line, a start-up serving to supply meals domestically. It additionally invested in Hyphen, a start-up bringing robotics and automation to business kitchens.
Chipotle’s funding in Brassica does not appear to suit inside its specific targets.
Brassica is not the primary restaurant chain that Chipotle has ever invested in. In 2013, the corporate invested in a pizza chain referred to as Pizzeria Locale (now closed down). It is tried constructing a number of different restaurant ideas by means of the years. Nevertheless, that is the primary funding in a restaurant chain from its enterprise capital fund.
In relation to issues corresponding to restaurant automation or provide chain, it is easy to see how these investments might straight profit Chipotle Mexican Grill. Maybe by funding a robotics firm, for instance, there can be a food-prep robotic breakthrough. Finally, Chipotle might grow to be a buyer and use robots in its kitchens (which, by the way, it’s).
Nevertheless, concerning its funding in a restaurant firm corresponding to Brassica by means of its enterprise fund, the profit to Chipotle is much less clear.
What this does and doesn’t suggest
On the floor, it seems like Chipotle is funding a competitor within the Mediterranean meals house, which would appear dangerous for Cava. However not so quick. Traders can be remiss to not bear in mind a lesson from historical past.
Over time, there have been numerous headlines explaining how chains corresponding to Qdoba, Taco Bell, Moe’s Southwest Grill, and others would steal gross sales away from Chipotle. However competitors did not forestall Chipotle from rising its gross sales 12 months in and 12 months out. Subsequently, even when extra competitors arises for Mediterranean delicacies, this may not essentially influence Cava.
Furthermore, it is attainable that Chipotle genuinely needs to see Brassica succeed due to its want to serve natural meals that is sourced domestically — consistent with Chipotle’s mission. Some assume that Chipotle needs to ultimately take over Brassica and increase it right into a formidable Cava competitor. However possibly it has no such intention.
No matter what occurs with Chipotle and Brassica, I believe this story is a reminder that Cava might want to defend itself towards upstart rivals because it grows. Success and measurement invite competitors.
In that regard, Cava is in an excellent place to defend itself. Not solely is recognition hovering, as evidenced by its Q2 same-store-sales progress of 14%, nevertheless it additionally has almost $350 million in money and money equivalents and 0 debt. That is an excellent place to be.
Nonetheless, with Cava inventory buying and selling at its highest valuation ever at almost 19 instances gross sales — one of many priciest restaurant shares on the market — traders ought to ask how huge the dangers are for this firm and whether or not the potential reward is excessive sufficient to justify the danger. In spite of everything, at this valuation, a variety of good issues are already priced in for individuals who purchase right now.
