When the Mexican-themed food chain Guzman y Gomez listed on the Australian stock market in June, its share price rocketed by more than one-third in a single day of trading, creating a $3bn company.
One factor that won over investors was a pledge to aggressively expand in Australia and push deep into the lucrative US market.
GyG plans to increase the number of its Australian stories from less than 200 to more than 1,000, a figure chosen to rival McDonald’s, and build on its international network, which now includes four outlets in the Chicago area.
But the American dream has often proved a step too far for Australian fast food businesses due to different tastes, supply chains and portion sizes.
Does the US, already awash with Mexican-inspired chains and an abundance of authentic Latin cuisine, really need another burrito option?
Expanding burritos
Stewart Oldfield, a director of the consulting firm Field Research, says the US is among the world’s most competitive fast food markets, and has previously proved too tough for local chains such as Crust Gourmet Pizza and Oporto to crack.
“The US is a graveyard for many Australian corporates,” Oldfield says.
“Going to the US is pretty bold because it’s the US that exports … [fast food] to the world.”
US consumers typically demand larger portions than Australians, upsetting fast food models developed locally, and consumers have different demands.
GyG is aware of the portion expectations. It has not been widely publicised that the chain offers a larger burrito, with more meat filling, in its US stores than in its home country.
A spokesperson said its standard GyG burrito in the US weighed 560g, compared with 480g in Australia, and the American version boasted 10% more meat filling.
After currency conversions, the American burrito is also cheaper, working out at about A$12.60 (with no extra fillings) compared with $13.80 in Australia.
“We have always had a localised menu in our international markets to cater for the preferences for the guests in that country,” the spokesperson said.
“As a result there are minor differences between our menu items here and the US but nothing that presents a material challenge from an economic perspective.”
It’s likely GyG’s American portions are designed to compete with the US chain Chipotle, although there are also numerous Mexican-themed restaurants standing in its way that offer significantly bigger burritos with more meat filling, a factor noted by Field Research.
The most extreme offers include an eight-pound (3.6kg) burrito from Texas-based Freebirds which is about the size of a large forearm.
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Fickle food
There are widely contrasting views on the value of GyG among analysts.
Morningstar researchers value the stock at $15, about half the current trading price, while the stockbroking firm Morgans describes the company’s growth as “explosive” and believes investors will be “well rewarded” over time.
“To justify the current share price of GyG (or, indeed, to see upside to it), you have to believe that the long-term growth story is not just possible, but likely,” Morgans says in a note.
Morgans expects the share price to double to above $60 over the next two decades if it can open 500 American stores.
Burritos are having their time in the sun in Australia, with GyG’s rival Zambrero also expanding rapidly last year, according to research from GapMaps.
But food trends are notoriously fickle. The number of Red Rooster and Nando’s stores fell last year and Domino’s is shutting dozens of stores as its expansion in Japan and France falters.
The chief economist at Betashares, David Bassanese, says GyG listed at a rich valuation and would need to execute its growth plans well to justify it.
“Obviously, it’s a top dollar valuation and we’ve seen examples where companies have great ambitions, do very well for a while, and then they run out of growth opportunities,” Bassanese says.
“It’s a question of: how much do Australians love Mexican food, and particularly GyG’s variety of Mexican food?
“Then it’s about growing internationally, where it’s even tougher to succeed.
“There’s no magic ingredient in terms of making Mexican food. Fast food is a commoditised process, and it’s about who can execute.”