Guzman y Gomez storms the ASX, but can the good times really last?

<span>Guzman y Gomez, whose share price surged on its ASX debut, wants to grow five-fold to 1,000 Australian stores, which is comparable to McDonald’s.</span><span>Photograph: Scott Murdoch/Reuters</span>
Guzman y Gomez, whose share price surged on its ASX debut, wants to grow five-fold to 1,000 Australian stores, which is comparable to McDonald’s.Photograph: Scott Murdoch/Reuters

Guzman y Gomez has a good story to sell.

It’s fast food, but “clean” – and clean is the new healthy, according to the Mexican-themed chain. Importantly, people seem to like eating there; who doesn’t like a burrito?

Investors also appear enamoured, with its share price rocketing by 36% on its first day of trading on Thursday. Some analysts, however, are less gung-ho, warning “there’s plenty of things that can go wrong” now Guzman y Gomez is a listed company.

So is GyG, which is its acronym and stock market ticker, the future of fast food in Australia, as its storming ASX debut might suggest?

And what exactly is “clean food” anyway, given GyG’s burritos have more calories than a Big Mac, and the chain serves nacho sundaes?

Fussy eaters

Food trends are notoriously fickle.

As burrito rivals GyG and Zambrero expand rapidly across Australia, the number of Red Rooster and Nando’s stores decreased last year, research from GapMaps shows.

According to GyG’s pitch to investors, it wants to increase its network five-fold to 1,000 Australian stores in 20 years, which is comparable to the number of McDonald’s outlets in Australia today.

Related: Guzman y Gomez share price surges 36% in ASX debut

The message is clear, GyG wants to be the next golden arches.

Omkar Joshi, the chief investment officer at Sydney-based Opal Capital Management, says the strong stock market debut that saw GyG shares surge from the $22 issue price to $30 does not provide leeway for things to go wrong. GyG shares closed the week at $29.

“The shares have been priced to perfection and there’s very little room for a slip-up. It’s a good business but I struggle to make this valuation stack up,” Joshi says.

“Nothing’s ever perfect and smooth sailing forever in food retailing. There’s plenty of things that can go wrong. And now that it’s a listed company, the market is going to be even more acutely focused on those things.”

Food retailers around the world have been caught out by food contamination scares, franchise problems and menu pricing miscalculations that have angered customers.

Competition can also stall expansion. With the US already home to several established Mexican-themed chains, GyG would face fierce competition as it also tries to get a foothold in that market.

None of those concerns dimmed investor appetite on Thursday, after brokers all but ensured GyG shares would rocket after listing, generating significant, and free, public exposure.

The number of GyG shares available to trade are a fraction of the company’s value, with more than half the company’s stock tied up in escrow.

This refers to shares that board members, senior management and existing backers won’t trade for at least 12 months, limiting selling pressure. This helped create a scenario of more interested investors than available shares, leading to a sharp stock price increase.

“It’s definitely done that way to manage the outcome,” Joshi says.

“The initial public offering felt more like a funding round rather than an IPO. It’s different to one where you’ve got lots of new investors coming on board.”

Morningstar has put a $15 valuation on the shares, about half the value the stock closed at on Thursday. It notes GyG has not yet carved out an “economic moat”, which refers to a competitive advantage that keeps rivals at bay.

It is also too early to know whether consumers will still feel like eating a burrito a decade from now, over other fast food options.

The GyG co-founder and co-chief executive Steven Marks says the company is pleased to have listed on the ASX.

He called it a “significant milestone” but said “we are still early in our mission to reinvent fast food and change the way the masses eat”.

“We remain focused on continuing to share our fresh, clean, fast made-to-order Mexican-inspired food with more guests across Australia and overseas.”

‘Clean is the new healthy’

With more than 1,200 stores, Subway has the biggest fast food network in Australia, ahead of McDonald’s (1,031) and KFC (785), according to recent data.

The submarine sandwich company, which opened its first Australian store in Perth in the late 1980s, grew by differentiating itself from rivals as a healthy fast-food alternative.

In a similar manner, GyG has adopted the “clean” description to describe its products.

A company spokesperson pointed Guardian Australia to its prospectus for a definition, which reads: “Our Australian food menu is 100% clean, meaning that it contains no added preservatives, no added colours, no artificial flavours, and no unacceptable additives.”

Even its nacho sundae – cinnamon sugar corn chips, soft serve and chocolate sauce – is served on ​​preservative-free soft serve, according to the menu description.

But some customers might be surprised to learn a grilled chicken burrito has more calories, kilojoules and saturated fats than a Big Mac; although a burrito is significantly bigger than a burger.

Prof Clare Collins, a director of the food and nutrition research program at the Hunter Medical Research Institute, says GyG nutritional information shows higher calories, fat, saturated fat and sodium (salt) content than many McDonald’s items. The exception, she says, is carbohydrates and sugars, where GyG is mostly lower than McDonald’s.

Collins says the health of any meal depends on the combination of food ordered.

“Do you go to Macca’s and eat one small burger and no fries?” she says.

Collins says the average adult needs about 8,000 kilojoules (roughly 2,000 calories) a day. Some GyG menu items have more than a third of that, “and that is based on you just eating one thing when you go there”.

A meat-filled Cali burrito, which has fries inserted, represents over half an adult’s daily energy needs, as do nacho fries.

Dr Fiona Willer, a dietitian and lecturer at the Queensland University of Technology, says a GyG beef burrito and Big Mac both have the same characterising ingredients – beef, cheese, bread and lettuce.

“The GyG burrito has more fibre and proportionally less saturated fat, thanks to the black beans. However, the GyG burrito is more than twice the size of the Big Mac so would suit someone looking for something more substantial. Gram for gram the GyG burrito offers more nutrient variety,” Willer says.

The nutritionist Dr Rosemary Stanton says GyG menu items “would certainly rate as ‘ultra processed foods’ (as do most other fast foods), due to the many additives”.

Analysts at Morningstar say GyG’s “restaurant economics” are very attractive at the moment, which supports a store rollout of about 40 outlets a year over the next decade.

But the longer term outlook is less certain, they say.

“The restaurant space is highly competitive,” Morningstar says. “Switching costs are nonexistent for patrons, barriers to entry are low, and consumer preferences can change.”

Advertisement