Wall Street's burrito battle yields hot air - Term Sheet

By David A. Kaplan, contributor

FORTUNE -- There's Coke vs. Pepsi, McDonald's vs. Burger King, and now Chipotle vs. Taco Bell -- improbably egged on by an outspoken hedge fund manager. Holy Guacamole: The entertaining Wall Street battle of the burritos is on!

The whole thing got started a few days ago when David Einhorn turned sour on Chipotle (CMG). Einhorn's the 42-year-old billionaire contrarian founder of Greenlight Capital best-known for selling Lehman Brothers short before its fall in 2008. In a talk at the Value Investing Congress in New York City, he recommended shorting Chipotle Mexican Grill, the fast-growing national chain that helped create the fast-casual trend in the 1990s. "Chipotle has been a great company," Einhorn said, not criticizing leadership or any fiscal fundamentals. "But it's on its way to becoming just a good company. The stock is vulnerable." Within minutes, Chipotle's stock fell more 7% -- it had been "Einhorned," meaning its stock price had dived merely because the hedgie said unkind things about it.

The problem, according to Einhorn, was "resurgent" competition from Taco Bell, owned by the restaurant colossus Yum Brands (YUM). The thing is, he argued, copycatting Taco Bell has a new "Cantina Bell" Menu -- and its upscale offerings are aimed at Chipotle lovers. He said his own survey showed customers visited both chains and Taco Bell did just fine by comparison. Try Taco Bell! Einhorn urged, kindly mentioning nearby locations in Manhattan. Given that Taco Bell has nearly five times as many outlets as Chipotle, and given Chipotle's recent price increases, he said Chipotle would likely lose some business.

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Not everyone was pleased in the land of Chipotle, where the cows are always happy and the chickens roam free. "Comparing [Chipotle] to Taco Bell?" tweeted xraystyle92. "Are you out of your godd--- mind?" Asked MikeDavis000 in another tweet, "Is David Einhorn high? Cuz that's the only time people eat Taco Bell." And there was this from @KidDynamiteBlog: I wouldn't serve TacoBell to my dogs, but I'd take my wife to $CMG. I don't see how the two are even comparable." You can't get this kind of incisive commentary even when listening to post-presidential debate punditry on cable.

In the investment community, there was indignation as well. One prominent manager who was early Chipotle investor, Damon Vickers in Seattle, went on TV and in email to harrumph. Commenting on Einhorn's focus on Taco Bell's cheaper prices, he wrote: "What is David, a first-year business major? Taco Bell is cheaper but so is pink slime vs. real hamburger." Vickers noted that he was long on Chipotle -- as well as Yum Brands (apparently notwithstanding food akin to "pink slime").

Food fight! Food fight! This is almost as amusing as when a Slate columnist earlier this year compared Chipotle to Apple (AAPL) in terms of innovation, and Silicon Valley wags shot back that a burrito is no iPhone. (When a taco has an app or your mobile phone gives you gas, we'll get back to you.)

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A food survey on Mexican chains released the next day by Market Force reinforced the view of Chipotle fans that its food was better. Taco Bell was outscored on taste, service, cleanliness and atmosphere -- beating out Chipotle only on overall value. Another poll, from YouGov BrandIndex, nonetheless suggested that the gap between Chipotle and Taco Bell was narrowing. And Zagat in July threw Taco Bell a nice bone. "For practically half the price," Zagat said, "the Cantina Bell menu is a definite value, but you do get what you pay for, and the overall quality and taste of Chipotle still has a slight edge over Taco Bell."

The Cantina Bell offerings come from "celebrity chef" and former paralegal Lorena Garcia (if you count "Top Chef Masters" on Bravo as celebrity-making). "Think Taco Bell can't do gourmet?" asks the website. "Then you haven't met Lorena Garcia!" The menu, which she proclaims "very delicious!" and "beautiful" and "created with love" includes grilled marinated steak, citrus-herb marinated chicken, guacamole, pico de gallo, and "real" black beans. Sort of like, you know, some of Chipotle's food.

For its part, Chipotle stayed above the fray. "There has certainly been some blowback stemming from Einhorn's comments among media and analysts, though I'm not sure how much attention our customers pay to things like this," founder and co-CEO Steve Ells told Fortune by email. But, he added, "we do not see any evidence that Taco Bell has had any impact on our business. Our approach to sourcing and preparing food is very different from traditional fast food, and our customers seem to appreciate the difference."

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Taco Bell did not respond to a request for comment.

Near the end of the week, Chipotle's stock had fallen further -- down almost 9%, to below $288, from when Einhorn spoke. Though that isn't a low for the past year, the stock has been has high as $442 in the spring. The price of Yum Brands, which includes much more than Taco Bell, was relatively unchanged during the week. (Prices could fluctuate until the end of the day.)

Source: http://finance.fortune.cnn.com/2012/10/05/wall-streets-burrito-battle-yields-hot-air/

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