Dear Reader,
Word leaked last week that Starbucks is talking to investment bankers about making a bid to buy Chipotle.
I want to walk you through why I think this is a terrible idea.
Not because I have a horse in the race.
Because it’s a perfect teaching moment for how I think about management when I’m considering any investment.
The Four Questions
I’ve said this here many times.
Before I ever buy a stock, I ask four questions.
Do I understand the business?
Am I comfortable with management?
What is the business worth?
And what do I have to pay?
Today I want to focus on question two.
Because this Chipotle story is a textbook example of why that question matters so much.
What Niccol Has Done Well
Brian Niccol joined Starbucks two years ago to engineer a turnaround.
He came from Chipotle, where he was CEO.
And to his credit, the early work has been impressive.
Global same-store sales are up 7.9%.
Transactions — the number of customers served per hour — are up 4.2%.
Average ticket price is up 3.5%.
He instituted a four-minute rule.
Every order completed and handed off within four minutes.
That is how you increase revenue in a retail business.
More customers. More per transaction. Faster throughput.
Speed is the key.
In business and in warfare.
What He Still Has to Do
We’re midway through this turnaround.
There are three things still on the list.
First, efficiency — using technology to serve more people without adding labor costs.
Second, cost savings — he’s talked about shaving $2 billion a year from the cost structure.
Third, and most importantly — moving to an asset-light model.
Here’s why that third one matters so much.
McDonald’s doesn’t own its stores. It franchises them.
When you franchise instead of own, your capital investment shrinks dramatically while your returns stay the same.
That’s a massive improvement in return on capital.
Starbucks still owns most of its stores.
The opportunity to become more like McDonald’s — to clip cream off the top without carrying all that real estate on the balance sheet — is the most compelling remaining play in this turnaround.
That is what Niccol should be focused on right now.
What He’s Actually Doing
Instead, word is leaking that he wants to buy Chipotle.
The company he used to run.
I have never seen a restaurant chain acquisition like this work.
There are almost no real synergies here.
The only overlap anyone can point to is that a lot of Chipotle locations are within a mile of a Starbucks.
So theoretically you could merge them and have a coffee and taco joint.
Which is interesting — but not a $50 billion thesis.
Let’s do the math.
Starbucks has a market cap of around $100 billion.
Chipotle is worth roughly $40 billion before any deal premium.
To buy Chipotle, Starbucks would likely have to pay $50 to $60 billion.
That means Starbucks shareholders would essentially be giving away half the company to acquire a Mexican fast food chain with no meaningful overlap.
That is not a good use of capital.
That is not a serious idea.
What This Actually Tells You
Here’s the real lesson.
A lot of CEOs are great when they’re building.
But when the hard, grinding work of execution and efficiency replaces the excitement of transformation, some of them get bored.
They look for the next big thing.
They listen to an investment banker pitching them a deal.
And they destroy shareholder value chasing the old pizzazz instead of doing the work in front of them.
That is what appears to be happening here.
And it’s exactly why question two — am I comfortable with management? — is so critical before you put your money into any company.
You want managers who are obsessed with what they have.
Who are focused on squeezing every dollar of return out of the business they actually run.
Not ones who are looking for distractions.
Not ones who want to buy their old company back.
I’m not a supporter of this deal.
And if it goes through, I’d be taking a hard look at any Starbucks position.
What the Opposite Looks Like
So what does a management team I am comfortable with look like?
Let me show you one I’ve been digging into.
It’s a company in Cleveland, Ohio.
Its parts fly on nearly every commercial and military aircraft you’ve ever seen.
And on most of those parts, it’s the only approved maker on Earth.
Year after year, its own filings repeat the same goal: deliver returns comparable to well-performing private equity funds.
It has bought dozens of small parts businesses since 1993 — one after another, the same kind of business it already knows how to run.
That’s what an acquisition with real synergies looks like.
Since 2009, it has mailed shareholders twelve special dividends — $394.50 per share, all told.
And here’s the part I love.
When those checks go out, the people who run the company receive matching cash payments on their stock options.
They cash the same checks you do.
In February, the CEO even bought shares with his own money.
Nobody there is chasing the old pizzazz.
They’re obsessed with what they have.
I’ve put together the full story — including the company’s name and ticker, free of charge.
Have a wonderful Monday.
“The Buck Stops Here,”
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Written by Dylan Jovine