By Glen Korstrom
Nine Vancouver entrepreneurs intend to cash in on the recent upswing in demand for upscale fresh Mexican fast food by buying franchises from fast-growing Ontario-based Mucho Burrito.
During the past few years, Chipotle Mexican Grill (NYSE:CMG) has been the U.S. restaurant sector’s premier growth story. Thus far this year, its stock is up 86% and repeatedly hit all-time highs of about US$163 in early September.
Chipotle is a McDonald’s Corp. (NYSE:MCD) spinoff. It focuses on Mexican fast food that’s a step up from what’s served at privately held Taco Time and Yum! Brands, Inc. (NYSE:YUM) subsidiary Taco Bell.
When Chipotle went public in 2006, it doubled its value on its first day of trading and then jumped six-fold in the next two years.
Revenue in the quarter that ended June 30 grew to US$466.8 million – up 20.1% from the same quarter a year ago. The quarter’s same-store sales grew 8.7% compared with the same quarter in 2009. That’s more than twice the 4.3% annual same-store sales growth that the 1,001-location Chipotle had in 2010’s first quarter.
All Chipotle stores are in the U.S. except for two that are in Toronto.
“I’m a big fan of Chipotle Mexican Grill but they don’t franchise,” said 25-year-old Ron Sandher, who bought Mucho Burrito’s first B.C. franchise earlier this year.
“There’s Taco Del Mar and places like that, but it didn’t have the quality we wanted. Mucho Burrito is the closest thing to Chipotle. People try to compare us to Taco Bell and Taco Time, but we’re completely different. We have fresh food.”
He believes the difference between a Mucho Burrito and a Taco Bell or Taco Time is similar to the difference between a McDonald’s restaurant and a Vera’s Burger Shack or a Triple-O’s.
That’s because his food is made fresh, and he is licensed to sell alcohol. Because Mucho Burritos have no table service, they’re not considered full restaurants.
Mucho Burrito had four stores in 2008. Today it has 26.
Sandher and business partner Joe Sangha opened their restaurant in Burnaby in March and are negotiating with an Abbotsford developer to lease space in a planned west Abbotsford project so they can open a second location by the beginning of 2012.
A different Mucho Burrito franchisee plans to open a restaurant on Davie near Burrard Street in December.
Other franchisees plan to open Mucho Burrito restaurants next year in Victoria, Vernon, Kelowna, North Vancouver, Richmond, Surrey and Vancouver.
The longer-term plan is for 25 B.C. locations by 2015.
Mucho Burrito owner Alex Rechichi has a history of successful franchising.
He also founded and owns Extreme Pita, which has 270 locations, including 19 in B.C.
Rechichi has rolled both Mucho Burrito and Extreme Pita into a holding company that he calls Extreme Brandz. His newest concept, Pur Blenz natural smoothies, has two locations.
He told Business in Vancouver that annual system-wide sales for all those ventures top $70 million.
Mucho Burrito franchisees pay a flat $20,000 franchise fee, an ongoing 5% royalty on sales and 4% to a marketing fund.
“Our plans are to locate and add more resources locally in B.C. so we can focus on development and support for our existing restaurants,” Rechichi told BIV earlier this year when he was in B.C.
“We’ve had continuous growth. We add 30 to 40 restaurants a year for Extreme Pita.”
All Mucho Burrito restaurants are franchised, whereas all but five Extreme Pita locations are franchised.
Chicago-based restaurant industry research firm Technomic released a report August 31 that found restaurants still consider new franchise agreements to be a main avenue for growth.
In response to the ongoing sluggish economy, however, the report noted that many franchisors have had to offer enticements to potential franchisees, which Mucho Burrito has thus been able to avoid.
These incentives include:
- enhanced credit support;
- fee reductions; and
- temporarily reduced royalty fees.
According to Technomic executive vice-president Darren Tristano, “A focus on growing the franchise system allows franchisers to spend less on restaurant-level operations and redirect capital toward systemwide marketing and brand initiatives.”
Denver, Colorado
CEO: Steve Ells and Montgomery Moran
Employees: N/A
Market cap: $5.1b
P/E ratio: 34.91
EPS: $4.72
Sources: NYSE, globe investor