Image by Getty Images via @daylife
Revenue growth is a wonderful thing. It is so much more fun to work in a growing company than one that isn't. And high growth is possible, even in this struggling economy, if leaders focus on trends.
Take for example Chipotle. Whether you eat there or not, Chipotle has grown rather spectacularly. From 16 units in 1998 it grew to 500 by 2005 and now has 1,100 company owned and operated stores. Revenues have more than doubled since 2005, to about $2B, while sales per store increased almost 12% in 2010. And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!
Chart source Yahoo.com 12.12.11
Chipotle hit on new trends with "Food with Integrity."
While that phrase is far from explicit, Chipotle has made a practice of talking about being "natural." Chipotle often buys local produce for its units, claims to use "natural" meat, presumably with fewer additives, and brags about having no hormones in its dairy products. Such claims have tied to customer trends for better nutrition, higher food safety and improved taste. This allows Chipotle to grow in the most intensely competitive of industries, even during a struggling economic time.
Compare this with McDonald's. This is not a random selection, as McDonald's was a 1998 investor in Chipotle, and put around $360M into the chain fueling early growth. McDonald's was handsomely rewarded for this, receiving around $1.5B (4x) return on its investment when selling Chipotle to the public in 2006.
At the time, McDonald's was in a horrible situation. It's stock had dropped from a high of $50 in 2000 to a low of $14 in 2004. McDonald's took the money from the Chipotle sale and invested all of it in new capital expenditures to defend the McDonald's franchise. The good news was that "turnaround" worked and McDonald's recaptured its value, roughly doubling market capitalization the last 5 years.
One could consider both of these success stories, unless you look deeper.
Since 2006 Chipotle increased its valued by 6x, McDonald's by 2x - so investors in the former did fully 3x better than the latter. And where Chipotle is expected to increase the number of its stores by at least another 1/3 in the next few years, McDonald's struggles to find growth markets. Clearly, investors that swapped their McDonald's stock for Chipotle's stock in 2006 did far better - and have prospects of continuing to do even better still with at least some analysts expecting Chipotle to hit $400/share within a year, for another 20% pop.
Source: Yahoo.com 12.12.11
McDonald's strategy was built on a 1960s trend for speed and consistency in food. That trend served McDonald's well for 2 decades, but is far less interesting today. In its effort to generate revenues this October McDonald's brought us a re-introduced 20 year old product called McRib - a product who's ingredients have people asking questions about health and safety (TheWeek.com "What's the McRib made of, anyway?) as they learned its mostly high fat pig innards and salt. While McDonald's has recovered from 2004, is it a platform for growth?
Chipotle is using trends to find new products, new marketing themes, and even a new store concept, Shophouse Southeast Asian Grill, for organic growth. Where McDonald's is fixated on defending its historical business irrespective of trends, Chipotle is busy exploiting them with their investments.
This could have been a very different story.
One has to wonder, what if instead of selling Chipotle, McDonald's leadership had turned upside down? What if instead of selling Chipotle to raise money to invest in struggling McDonald's all that smart management attention had gone into exploding Chipotle's footprint faster? Introducing even more products? What if McDonald's remade itself into Chipotle's, using McDonald's cash to drive the "next big food concept?"
And what if those managing McDonald's had accepted the trends propelling Chipotle growth and applied them to McDonald's? What new and different customer value proposition could McDonald's have developed? What real new products could have been developed for all those tired McDonald's menus?
McDonald's could have acted more like Apple.
Where McDonald's has at its core fried meat sandwiches and deep fried potatoes, Apple had its "core" the Macintosh. But instead of investing its resources into defending its core, Apple invested in new products and markets where the trend was more favorable. As a result its market cap grew by 4.5x during the last 5 years, compared to the more subdued 2x at McDonalds - and Apple demonstrated that even very large market cap companies can grow at very high rates when they adopt growth strategies tied to trends.
Source: Yahoo.com 12.12.11
There are a lot of businesses struggling to grow today. But most aren't really trying. They keep doing more of what they've always done, and hoping for a better result! They don't accept that trends go in new directions, causing markets to shift. When markets shift, those who follow the trends do far better than those stuck trying to defend their past strategies. It's smart to act like, and invest in, Chipotle while avoiding the rut that is McDonald's.
Links:
How McDonald's focus on operational improvement blinds it to new market opportunities
How McDonald's fascination with its old success formula positioned it for attack in 2004
How luck helped McDonald's sales from 2006-2010
How McDonald's benefitted from Starbucks missteps in 2009
Why McDonald's should have never sold Chipotle
