Brian Niccol, CEO of Chipotle Mexican Grill (NYSE:CMG)to take the same position at Starbucks (NASDAQ:SBX) caused a stir in the market, with Starbucks stock soaring and Chipotle stock sinking. The immediate reaction was understandable. Starbucks was in crisis and needed a jolt, and Niccol was having a very successful run at Chipotle.

Now that the dust has settled, however, I expect Chipotle stock to outperform Starbucks in the restaurant space over the next five years. Let’s look at why I think that.

Starbucks’ problems won’t be solved overnight

When Niccol takes over as Starbucks CEO, he will have to solve two major problems: declining sales in the U.S. and a weak Chinese market.

The first problem has several causes. First, customers seem to have started to rebel against the high prices of Starbucks drinks. At the same time, they are frustrated by the long wait times, which are partly due to a lack of staff.

Before Niccol’s arrival, Starbucks tried to reduce wait times through technology and other streamlining measures, although some of the human touch of the Starbucks experience was lost in the process. While the obvious answer would be to bring more baristas into understaffed stores, that will incur additional costs.

However, China is a bigger problem for the company. The country is seen as the biggest growth engine for the company, but existing stores are struggling due to fierce competition and a lack of spending appetite among Chinese consumers. Luckin Coffee has overtaken Starbucks as the largest coffee shop in China in the last year, while a number of newer cafes such as Cotti Coffee have also sprung up. The competition has also significantly undercut Starbucks on price.

Niccol does not have much experience in dealing with the Chinese market. He could outsource the Chinese business, as Yum! Brands has with Yum-Chinabut this just pushes the problem aside rather than solving it.

Image source: Getty Images.

Chipotle has better pricing power and expansion opportunities

One of the big differences between Chipotle and Starbucks lately is that Chipotle’s customers seem to find its offerings much more valuable and are much more willing to accept price increases, as evidenced by the sales figures for both companies’ stores.

In the second quarter, Chipotle reported an 11.1% increase in in-store sales. Prices were 3.3% higher year over year, but customer traffic still increased 8.7%. For those doing the math, mix, or the change in the different items ordered, declined about 1%.

Chipotle increases its prices fairly consistently by 2 to 3 percent each year. However, the company has also made larger price increases due to COVID-19 and recently in California due to new minimum wage laws. Despite the price increases, the company continues to see strong customer traffic at its restaurants.

Starbucks, on the other hand, has been struggling with a decline in comparable store sales in the US recently as customers balk at high prices. In the fiscal third quarter, comparable stores in the US declined 2% while foot traffic fell 6%. The previous quarter was similar, when comparable stores in the US declined 3% and foot traffic fell 7%. For many people, Starbucks is a small luxury and they are less likely to indulge in it due to the increased costs.

Chipotle also has much more expansion opportunities than Starbucks. The coffee chain already has almost 39,500 stores worldwide, including over 18,000 in North America. It is quite saturated in the US, while it is primarily looking to the difficult Chinese market for the growth of new stores.

By comparison, Chipotle had just over 3,500 locations. The company plans to open between 285 and 315 new restaurants this year, so it’s seeing nice high-single-digit growth each year. The company has also only just scratched the surface in terms of international market opportunities. Overall, it simply has a much longer runway for growth in opening new locations compared to the larger Starbucks.

Reviews

From a price-to-earnings (P/E) perspective, Starbucks is the cheaper stock. However, Chipotle has grown its earnings much faster this year and the opportunities for expansion are much greater.

CMG P/E data (Forward 1 year) from YCharts.

While I think both stocks can be winners over the next five years, I’m betting on the company with the better opportunity for expansion and revenue growth in its stores. Right now, that’s clearly Chipotle, and losing its CEO to Starbucks won’t change that.

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Geoffrey Seiler does not own any of the stocks mentioned. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, Luckin Coffee, and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.