Growth Is Tied To Trends Look Beyond The ’Core’

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 has 1,100 company-owned and operated stores today. Revenues have more than doubled since 2005, to about $2 billion, while sales/store increased almost 12per cent in 2010. And investors have been well rewarded, with a market cap increase of 6x in the last 5 years!

Chipotle hit on a trend it called 'Food with Integrity.' While that 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 into customer trends for better nutrition, higher food safety and improved taste. This allows Chipotle to grow in the mostintensely 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 $360 million into the chain,thus fuelling early growth. McDonald's was handsomely rewarded for this, receiving around $1.5 billion (4x) return on its investment when selling Chipotle to the public in 2006. At that time, McDonald's was in a horrible situation. Its 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 franchise. The good news was that 'turnaround' worked and McDonald's has recaptured its value, roughly doubling market capitalisation in the last 5 years. One could consider both of these success stories, unless you look deeper. Chipotle increased its valued by 6x, McDonald's by 2x  so investors in the former did fully 3x better than the latter. And while 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 who 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 per cent pop.

McDonald's strategy was built on the trend of 1960s for speed and consistency in food. That trend served McDonald's well for two decades, but is far less interesting today. In its effort to generate revenues, recently McDonald's brought us a re-introduced 20-year-old product called McRib this October  aproduct whose ingredients have people asking questions about health and safety (TheWeek.com: What's the McRib made of, anyway?) as we learn itsmostly 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 investing in current trends. One has to wonder, what if instead of selling Chipotle, McDonald's leadership had turned upside down? What if all that management attention had gone into exploding Chipotle's footprint faster? Introducing even more products? And what if McDonald's had accepted the trends propelling Chipotle growth and applied them to McDonald's to give that chain a different customer value proposition and real new products? 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 favourable. 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.

There are a lot of businesses struggling to grow today. But most are not really trying. They keep doing more of what they have 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.