Chipotle’s problems could turn into good news for Whole Foods

Whole FoodsReuters

Chipotle has had a lot of problems lately.

First there was the E. coli outbreak, after which sales at the establishment cratered 30% in December.

Now customers have “menu fatigue,” meaning customers seem to be getting bored with the company’s limited options.

But Chipotle’s loss could be someone else’s gain. And the winner is Whole Foods.

In a recent note to clients, RBC Capital Markets’ William Krik and Shiyao Ling note that almost 85% of Whole Foods stores are located within 3 miles of a Chipotle. Roughly 50% of Whole Foods are located within a mile of a Chipotle.

Moreover, the median distance from a Whole Foods to a Chipotle is 1 mile.

Consequently, the analyst duo argues:

We assume that Whole Foods could capture 25% of nearest Chipotle’s lost sales when within a mile, 10% if 1–3 miles, 3% if 3–5 miles, and 0% greater than 5 miles. Note: This methodology implies that ~80% of Chipotles (415 Whole Foods on Chipotle store count of 2010) don’t have a Whole Foods close enough to be material. Put another way, we have Whole Foods’ opportunity as ~3% of lost CMG sales. The result is a 20bps lift to WFM this year and 30bps to next quarter.

That may not sound like that much, but it’s better than nothing.

“The set-up for Whole Foods is favorable for the next quarter, as the sentiment is low enough for the sales gained from Chipotle to generate some upside,” Kirk and Ling added.

Screen Shot 2016 02 24 at 10.24.42 AMRBC Capital Markets

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