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Chipotle’s CEO says this is how the company went from making customers retch to making shareholders rich

September 21
03:53 2019

Everything was going the wrong way for Chipotle when CEO Brian Niccol took over as the company’s big burrito in March 2018. The fast-casual chain couldn’t seem to shake off damage to its previously strong reputation and financial results in the wake of a number of outbreaks of food-borne illness nearly 2½ years earlier.

Chipotle stock dropped from $ 750 at the close on Oct. 13, 2015, to as low as $ 251.33 on Feb. 13, 2018, shedding 67% of its value as news that customers had fallen sick with E. coli began making headlines. As management raced to fix one set of problems, others popped up, including a data breach in March and April 2017 that affected restaurants in five states.

Wall Street downgraded the stock as analysts fretted that the company would be unable to win back lost customers.

They were wrong. On Aug. 29, 2019, the stock set a fresh all-time closing high of $ 843.64, topping a record set two days prior. Chipotle’s stock has soared more than 93% in 2019, compared with the S&P 500 index’s SPX, -0.49% 20% gain.

Chipotle’s Brian Niccol

“When I got to Chipotle, the company had tons of ideas — an almost crippling [number],” Niccol told MarketWatch. But now “I think we’re focused on the right strategies, execution is getting better, the response has exceeded expectations — I think that’s why we’ve seen the response from the financial markets.”

The turnaround at Chipotle extends to most of the business, including — importantly — the food. The company introduced a limited-time carne asada menu item this week that SunTrust Robinson Humphrey said “could be a meaningful traffic and check driver.”

See: Chipotle’s new menu items are key to its comeback story

CMG, +0.31% You might say Chipotle has gone from making its customers retch to, once again, making its shareholders rich.

The food is the same … sort of

The Chipotle brand has always distinguished itself on issues like sustainability, sound animal husbandry and responsible sourcing.

“Nothing’s changed on the culinary aspect and the ‘food with integrity’ purpose,” Niccol said.

Well, not quite “nothing.” Chipotle turned its focus to food safety in the months after the illness outbreaks were reported. Now the company is also looking at menu items, using a “stage-gate” system that tests, analyzes and gathers feedback about menu ideas to determine what gets a national launch.

So rather than consider every possible idea, the company has now instituted ways to improve discipline, Niccol said. “We’re using the stage-gate process to ask, ‘Does this idea have merit?’”

Prior to stage-gate, Chipotle stumbled when it added queso to the menu. The rollout was rocky, with negative social media feedback going viral and “surprising” executives.

Chipotle’s carne asada is available for a limited time.

The new approach seems to be yielding better ideas, including the introduction of carne asada. Chipotle is already testing other items, with queso blanco getting a limited-time push in three cities this summer.

“It’s not that they have gone away from that approach towards food, but they have broadened their horizons, in part because they’ve gotten past the food safety issues,” said Mark Kalinowski, chief executive of Kalinowski Equity Research. “A willingness to have new menu items is a dramatic shift for them culturally. There’s more reason, on this front, to go to Chipotle.”

Moreover, Chipotle is making news for these new food items.

“They’re in the news for the wrong reasons a lot less,” said Kalinowski. “So people can focus on the positive, like the food is tasty and the service is quick.”

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More access, less friction

“It used to be the only way to access Chipotle was to come in and stand in line,” Niccol said.

Now there’s an app, a loyalty program, and delivery, which will get Chipotle orders to customers in an average of 28 minutes. Customers can order through the app and then bypass the line to pick up their meals.

“We thought initially the app would be something more for heavy users,” Niccol said. It’s also been a plus for new customers, who may get anxious from the pressure of passing the add-on options and quickly making a decision with a long line of customers waiting behind them.

“They have a great experience and we find they become a repeat customer,” Niccol said.

Investors, who may have been anxious about Chipotle in the past, can take comfort in the company’s digital business, with sales growing 99% in the second quarter, accounting for 18.2% of total sales for the period. Revenue in the second quarter came to $ 1.4 billion.

“Chipotle’s digital ecosystem – which includes mobile order and pay loyalty [promotions] and digital delivery – has rapidly become the engine behind its impressive comeback story,” wrote KeyBanc Capital Markets in a July note.

Read: Why some restaurants are turning up their noses at Beyond Meat

Chipotle is still focused on food but attributes its turnaround to factors outside of the menu.

Lizzy Freier, managing editor at Technomic, a data and analytics provider for the food service industry, said digital is “the biggest thing driving Chipotle’s turnaround,” and these initiatives are key to bringing in millennial and younger, Gen Z customers.

“It takes a while for any chain to come back from widespread reports of food-borne illness,” she said. “I think the fact that Chipotle changed its whole marketing strategy recently really helped bring it out of its rut. It used to focus on local marketing, but has shifted this past year to national ads to make Chipotle and its branding message more visible to customers.”

Niccol, who was the CEO of Yum Brands Inc. YUM, -1.58%   chain Taco Bell before joining Chipotle, also highlighted Chipotle’s marketing.

“You see it in the advertising,” he said. “The reason why Chipotle exists is to give people a true culinary experience really fast in an affordable way.”

Chipotle became a smooth operator

Operations are where it all begins for Niccol. He says the company has a well-trained team that’s executing consistently and getting better over time.

“As digital grows and presents new operational challenges, we expect the company can pivot their store image and design to better emphasize and facilitate this fast-growing channel,” wrote Goldman Sachs analysts led by Katherine Fogertey in a June note in which they initiated coverage of the restaurant sector. Analysts added Chipotle to their “Conviction List,” rating shares buy with a $ 1,000 price target.

Read: Wendy’s making a $ 20 million bet on breakfast and analysts are skeptical

“Beyond just improving operations and experience for pick up and delivery orders (while also maintaining a strong dine-in experience), we see opportunities for kiosks and expanded Chipotlanes [drive-thru lanes] to help drive digital mix. We have confidence in the management team to implement such changes, and look forward to more announcements that will unlock sales opportunities that can have a powerful impact on traffic and customer service.”

The turnaround goes beyond dollars and cents

The opportunities ahead are based on the company as a whole rather than one aspect of the business, says Josh Ginsberg, chief executive of Zignal Labs, a media analytics and intelligence platform.

“They really aren’t associated with food safety and E.coli issues anymore,” he said. “The food is a piece of the overall experience but not necessarily the number one thing they’re highlighting. They’re taking a holistic approach that’s positive for their business.”

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When Jack Hartung, Chipotle’s chief financial officer, talks about the turnaround, he looks beyond the revenue, profit and stock price.

“We know the market is fickle,” he said. “We don’t celebrate too hard with the stock goes up and we don’t get too down when the stock goes down. We know the stock will take care of itself.”

From his perspective, Chipotle is willing to invest in its food mantra, with pricey ingredients like fresh avocados simply the cost of doing business. The comeback rests on what makes it unique and creates better relationships with customers.

Nearly four years on, the turnaround continues.

“We’re still in the early innings, and while we’re off to a great start we think we can do a lot more,” said Hartung.

Tonya Garcia is a MarketWatch reporter covering retail and consumer-oriented companies. You can follow her on Twitter @tgarcianyc. She is based in New York.

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