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    Can Chipotle Turn Potential Into Reality?

  • Wall Street has faith in CEO Brian Niccol's proposed changes. But when will they cash in?

    John Johnston/Chipotle
    What will Chipotle's menu innovations truly look like?

    No question, and with good reason, Chipotle’s score of Brian Niccol as CEO injected optimism into a brand that sorely needed it. His March hire sent Chipotle’s stock on an 80 percent run, and shares remain up more than 60 percent so far this year. But most of this positivity has been rooted in theoretical changes, target improvements, and the resume Niccol built directing Taco Bell, which sparkles with innovation across the operational spectrum.

    READ MORE: Chipotle to Close 55–60 Restaurants in Revamp Plan

    A special investor conference call June 27 answered some questions and left others wide open. It provided a runway for growth, but perhaps not enough nuts-and-bolts details to satisfy investors. On Tuesday, analysts at Mizuho Securities cut their rating of Chipotle to underperform from neutral, and raised the price target to $330 from $300—far below Wall Street’s average of $418, according to Bloomberg. The news dropped shares 2 percent or so throughout the day. The biggest issue, though, revolves around this question: What holes in Chipotle’s comeback plan does Mizuho forecast?

    Part of it isn’t that exactly; it’s the idea that a stock on an 80 percent run strikes a new risk-reward equation for investors than it once did. Yet, even so, the other side is worth exploring. Mizuho encouraged clients to take a wait-and-see approach with Niccol to gauge whether or not he can really bring the same kind of progress to Chipotle that he did to Taco Bell, which evolved into a lifestyle brand under his CEO tenure from January 2015 until this past March. Niccol led marketing at Taco Bell before becoming its president in 2013–2014. He oversaw Taco Bell’s introduction of breakfast, mobile ordering and payment, and several menu innovations, including the famed Doritos Locos Tacos and, most recently, the Nacho Fries.

    "In a concept where the vast majority of traffic occurs in the lunch daypart and the productivity of its line crew thrives on the simple ordering option tree, innovation can carry unintended consequences." — Mizuho Securities.

    In a note Tuesday, Mizuho analyst Jeremy Scott said: “While it is our view that Niccol is the best choice to lead Chipotle from here, in the absence of clear catalysts that can justify significant earnings upside, we're compelled to recommend investors reduce their risk. After an 80 percent run since Niccol's appointment as CEO, we believe the stock currently prices in an aggressive recovery in both comps and margins.”

    Scott added that a ramp in innovation at Chipotle would raise concerns around long-term margins due to incremental investment in labor, training, marketing, and technology upgrades. For example, what cost will accompany the chain’s plan to test a loyalty program in the second half of the year, with a proposed national launch slated for 2019? On that note and in regards to other innovations, he gave Chipotle a “hall pass” on comp sales and profit margins at least through the end of this year. But after that? Also, some short-term downside catalysts could be counteracted with new announcements and refreshed marketing. That’s assuming these upticks are significant and results driving.

    Chipotle earned $2.13 per share on $1.15 billion in revenue and posted same-store sales gains of 2.2 percent, year-over-year, in the first quarter. Both topped Wall Street expectations ($1.57 per share and 1.3 percent comps growth). The chain reports Q2 results on July 26.

    So what changes are in store?

    Other digital innovations on dock include in-app delivery of Chipotle’s food to 2,000 restaurants by the end of the year, and new digital-order pick up shelves. Chipotle is also adding flat screen TVs at some food prep lines to replace printed digital orders and improve employee productivity.

    Among Chipotle’s biggest changes is the closure of its Denver headquarters and relocation to Newport Beach, California. This move is expected to impact 399 employees, according to The Denver Business Journal. Chipotle said it would move all of its 400 or so corporate employees out of Colorado in the next six months to Newport Beach and its existing office in Columbus, Ohio. Chipotle is also shutting down its New York office, a move that will affect 32 employees.

    Beth Galton/Chipotle

    Ingredients were always the message for Chipotle. Does it need to be something more?

    Technology seems like an endless piece of real estate for Chipotle’s growth. Menu innovation, however, is a hotly contested topic of debate. Mizuho has some concerns about the process, typically snail-like or non existent at Chipotle, saying: “In a concept where the vast majority of traffic occurs in the lunch daypart and the productivity of its line crew thrives on the simple ordering option tree, innovation can carry unintended consequences.”

    Mizuho analysts visited Chipotle’s Next Kitchen and charted down some challenges. One was watching a quesadilla (rumored to be in the works for national launch) pulled out of the line by a separate crew member whose sole job was to administer the grill press, which “highlighted the complexities and potential deleverage of Chipotle’s new menu prospects, even for something as simple as 20 extra seconds of heat.”

    Chipotle has touted second make-lines as an operational investment with potential to solve some of these concerns. This past February, the company said it planned to spend $45 million to retrofit new make-lines at about 30 percent of its restaurants in an effort to increase the amount of digital orders that can be processed. These digitally enhanced second make-lines will be in about 1,000 restaurants by the end of the year. Will they also help streamline in-store menu innovations?

    Chipotle and Niccol have also spoken extensively about extended daypart hours. Niccol mentioned the addition of a Happy Hour to enhance Chipotle’s value proposition during non-peak snacking hours with $2 tacos with a drink between 2–5 p.m. “We’re also exploring a similar offer for increased late-night sales after 8 p.m.,” he said.

    Mizuho had this to say about the push, expressing concern about the added complexity in this field as well: “New daypart strategies are uniquely complicated for Chipotle given the extent of in-house food prep, as off-hours are often staffed to prepare for the next peak.”

    Niccol offered this take on menu innovations and Chipotle’s revamped rollout process (which Mizuho commended) during the call.

    “We think about menu innovation in four key ways,” he said. “No. 1, what do our customers tell us they want, like nachos and quesadillas [that] we’re experimenting with in the test kitchen. No. 2, items our customers tell us they want to bring back, like chorizo. No. 3, new items that can be unique to Chipotle, like the frozen Mexican chocolate milkshake, and the avocado tostada that are also in the test kitchen. And finally, No. 4, celebrating exciting items that are already in our restaurants [like Sofritas].”

    "Our ultimate marketing mission is to make Chipotle not just a food brand, but a purpose-driven lifestyle brand.” — Chris Brandt, Chipotle CMO.

    Returning to the flip side of these doubts, Mizuho said it could “be underestimating new management’s capacity to reinvigorate the brand image through powerful and persistent marketing of its commitment to ingredient quality, a narrative that has only intensified among its core demographic, and one that Chipotle arguably still owns.”

    Chipotle clearly agrees with this sentiment.

    Chris Brandt, formerly the executive vice president and chief brand officer at Bloomin’ Brands’ Outback Steakhouse, Carrabba’s, Bonefish Grill, and Fleming’s, who joined March 20, said in the investor call that he has never seen a brand with more purpose or passion than Chipotle.

    “Cultivate a better world isn’t just a slogan on a wall,” he said. “It lives in the hearts of our employees and their pride in serving people responsibly sourced, classically cooked food you feel good about eating. Many consumers feel that same passion as well.”

    Brandt’s career also included time at Taco Bell as chief brand and marketing officer. Brandt was at YUM! during some of Taco Bell’s most successful innovations, including the Doritos Locos Tacos and the quesalupa. He also oversaw the Happier Hour daypart push and breakfast, as well as digital initiatives such as the Taco Bell app. So this kind of statement should carry weight: “Our ultimate marketing mission is to make Chipotle not just a food brand, but a purpose-driven lifestyle brand.”

    What does he mean by that?

    “Chipotle will become a brand that people want to know about, want to be a part of, and want to wear as a badge. I genuinely think that Chipotle can transcend the food category, separate itself from everyone else, and be a category of one, because there are no compromises with Chipotle,” he said.

    To get there, Brandt said Chipotle must change its approach and evolve all of its marketing philosophy and tactics. This comes from striking a balance of traffic driving, short-term wins, and long-term growth. Chipotle wants to become culturally relevant and part of the conversation—something Niccol has stressed in the past, even calling the brand “invisible.”

    “We need to show people we can have some fun, because when a brand has a purpose, is visible, and is doing a fun thing that is a part of culture, people are more interested in it and want to be a part of. That’s how you become a lifestyle brand,” Brandt said.

    Chipotle put together a new advertising campaign in Brandt’s first couple of weeks and “was a noticeable pivot” from past work, with a nod to humor as well as ingredients.

    Broader reach and popular programs, with advertising in signature, culturally relevant programs, like the NBA playoffs and season finales of top shows, was a strong strategic push. And Chipotle even sponsored esports organization TSM’s competitive Fortnite team in late May.

    Brandt said employees as well as guests are responding to the boosted presence. He relayed a story where an employee told him, “It feels like we’re back on the front foot again,” as proof.

    He added: “there’s much, much more to come.” Chipotle is shifting its marketing from a field-based promotional-driven approach to a centralized strategy featuring broader reach with category users. The brand is putting a “stage-gate” process in place with dedicated resources to validate new product and promotional ideas (lessons from a troubled queso launch perhaps?)

    Chipotle expects to better promote its mobile and digital ordering and become more engaging on social media. It announced Tuesday an expanded partnership with Postmates to add 300 restaurants to its delivery capabilities and lower the fee.

    Brandt said a new tagline is coming this fall as well. Like many of the changes, however, we’re going to have to sit tight before the chips start to really fall.

    “Overall we’re going to be a much more agile, innovative, and visible brand that people will talk about,” he said.