Analysis Shows Chipotle's Biggest Threat Is Now Panera

Chipotle Mexican Grill, Inc.'s CMG biggest threat could be from Panera Bread Co PNRA, according to a note by UBS.

A Potent Threat

Analyst Dennis Geiger expects Chipotle's sales driving initiatives across technology, operations, menu and marketing to support gains in 2017.

"However, a still weak industry backdrop and heightened competition, which we expect will persist, remain potential headwinds to a meaningful recovery", the analyst cautioned.

UBS' analysis showed that Chipotle is facing notable competitive overlap within fast causal from Panera, with about 87 percent of Chipotles competing with Panera within a 10-minute drive. Among Mexican formats, the firm noted maximum overlap was with Qdoba, at 34 percent.

Though having less competitive overlap with smaller, emerging fast casual Mexican brands, UBS thinks these concepts are exhibiting significant growth rates, while also increasing competition for attractive market/site selection.

Weak Unit Growth

UBS sees strong development potential for Chipotle, although it feels unit growth could trail expectations, stung by challenged new unit productivity a continued sluggish underlying sales recovery and an increased focus on operations.

Substantiating its claims, UBS said, "Our UBS Evidence Lab analysis of Chipotle's restaurant footprint and new unit opens highlights deteriorating demographic trends, increasing competition in the Mexican and select fast casual segment, and potential cannibalization."

Specifically, the firm models approximately 7.5 percent compounded annual growth rate in units through 2020, softer than the consensus outlook of 8.5 percent growth.

Demographic Trends, The Culprit

UBS noted new units were opened in locations that are less populated and less affluent than its current store base. Accordingly, the firm believes declining trends could potentially represent a drag on unit volumes and returns over time.

UBS has a Neutral rating and $410 price target for the shares of Chipotle.

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