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Conclusion: CMG’s move into the Asian food segment is interesting but certainly not a guarantee of accretion to shareholder value.  Many good operators have lost focus in the past by “diversifying” and ultimately ended up failing.  PF Chang’s is unlikely to take the challenge lying down!

If I were to guess, I would say that the street will be overwhelmingly bullish about the prospects of CMG repeating the Chipotle business model with an Asian flair.  I hate to be so cynical all the time but I’m blaming that on being a restaurant analyst for so many years.  I know they said it will only be one restaurant in 2011, but there is so much more behind the move into Asian segment.  Just ask any management tried to take share in a new category; there are plenty of them.

The key reasons usually are:

  1. More capital than they know what to do with
  2. Need another growth vehicle
  3. Both reasons lead to management being distracted and lower returns for shareholders - never a good combination.

Then there is the list of failed attempts at multi-branded restaurant companies:

  1. McDonald’s - Fazoli’s and Donato’s (of course they were early on the Chipotle band wagon)
  2. YUM - I forget the name of the company but it was part of the dual-branding strategy
  3. Wendy’s - You can’t forget the Baja Fresh debacle and now, once again, with Arby’s!
  4. JACK tried to get into casual dining
  5. Carl’s Jr and Hardees’s
  6. Darden with China Coast, Smokey Bones and Bahama Breeze
  7. Brinker with Macaroni Grill and On The Border
  8. Outback steakhouse and too many brands to name
  9. Cheesecake tried to expand with Grand Lux
  10. PF Chang’s has been struggling with Pei Wei for years
  11. Cracker Barrel changed the name of the company to CBRL group in a failed attempt to diversify
  12. O’Charley’s buying 99 Restaurant group
  13. Applebee’s tried get into Mexican food

I don’t know Steve Ells personally and he has certainly put together an enviable restaurant business with Chipotle.  The chances of his potential Asian restaurant concept that follows the Chipotle model being successful are slim, in my view.  Mr. Ells is a restaurant entrepreneur and that will never change.  The Chipotle concept is bigger than he is now, which is why he is probably bored and looking to conquer another segment of the restaurant industry with his “food with integrity” mantra.

If he does goes after the Asian segment with the same flair by insulting the quality of other Asian concepts, who will stand up to the challenge?  Will the senior management team at PFCB let him get away with the rhetoric?  The implication that Ells’ restaurant’s food is better than the competition will be more difficult to make in this category than it was with Chipotle.  PF Changs, with Pei Wei and the PF Chang’s frozen food options in particular, are not likely to sit back and allow their market share to be eroded without a fight.

Howard Penney

Managing Director