Like SBUX, CMG seems to be doing the right things…investing in labor (to increase throughput), food quality and sourcing (“food with integrity”) and marketing to drive a better customer experience and improved traffic.  Higher YOY labor and marketing costs, along with modest food cost inflation, will put increased pressure on restaurant level margin in 2H10, but this seems to be a high quality problem and also a function of tough comparisons.


Comp Trends:


As I said in the CMG – FIRST LOOK post, comp performance will likely matter more to investors and CMG stated that its sales momentum continued into July.  Management said it is cautious about the current economic environment and the recently reported softness in consumer confidence, but it has not yet seen an impact on trends.


Due to the still fragile consumer, CMG has no plans to increase pricing unless they face significant food cost inflation, which they are not currently expecting (guided to modest inflation in 2H10).


Real Estate Strategy – A-model sites:


CMG commented on the success of its A-model sites, which is the new development model it is using to enter tier two trade areas.  These sites require less investment costs.  I criticized this strategy when CMG first announced it as I thought it might cause the company to be less disciplined about its real estate site selection.  Specifically, management had said the A-model sites allowed the company to “bolster [its] real estate portfolio while the sluggish economy limits the availability of the new developments that [it] traditionally pursued.”  I questioned whether the company would be better served to slow growth rather than pursue tier two sites.


The company is still in the early stages of this development strategy but management said that these A-model sites continue to open at similar sales levels to traditional units with lower occupancy and development costs.  We will have to see what happens after the honeymoon sales period, but the early results sound promising.  Only 10 A-model sites are open at this point but they are expected to account for 25% of the company’s 120-130 unit openings in FY10.




Howard Penney

Managing Director



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