Digital transformation is sweeping through the fast-food sector and managers at Chipotle Mexican Grille (CMG) are giving a masterclass on doing it right. Therefore, shares are still a buy, states Jon Markman of Pivotal Point.
Company executives were at a Morgan Stanley retail conference last week talking about mobile applications, reward programs, and restaurant drive-thrus without menu signage or cash registers.
The future of quick service restaurants is heavy on the quick.
Chipotle isn’t the first company to come to this conclusion. Starbucks (SBUX) began its order ahead and digital rewards program way back in 2009. And McDonald's (MCD) is investing heavily to speed up its drive-thru operations with dynamic menus and even artificial intelligence. However, Chipotle is taking fast to the extreme.
The Newport Beach, California-based company introduced Chipotlanes in 2019. The big idea was to speed up the way customers ordered and picked up freshly cooked Chipotle food. Orders and payments were moved inside mobile applications and onto the web. Pickup times became a function of kitchen congestion. When customers arrived at the drive-thru window they simply ask for their order and drive away. The entire process takes only 12 seconds.
The strategy was brave, prescient, and entirely necessary.
Brian Niccol, chief executive officer, came to Chipotle in 2018. It was shortly after a series of E.coli incidents nearly brought the restaurant chain to its knees. The veteran of Taco Bell quickly made digital transformation a top priority to win back customers. It was also part of a larger strategy to build new loyalties by meeting its mostly millennial patrons where they lived.
It worked. A fledgling rewards program went from a standing start to eight million members heading into February 2020. Growth was faster than Starbucks or McDonald's. Then the pandemic hit. As Chipotle dining rooms closed membership soared to 17 million in a matter of months.
That’s when the genius of the digital strategy became apparent.
Niccol said last week that the influx of new digital memberships taught sales and product managers a lot about Chipotle customers. They discovered patrons felt good about eating at Chipotle. They liked the corporate commitment to sustainability and local food sourcing. Surveys showed they thought of Chipotle as a good corporate citizen doing right by the planet and its employees.
From an operational standpoint, measuring clicks, swipes, and purchases also taught managers that targeted offers could significantly influence purchase frequency. Those new offers, according to a press release in October have contributed to $2.5 billion in digital sales so far in 2020, almost 50% of total revenues.
The story for investors is the payoff for early investments in digital are only beginning.
That’s where Chipoltlanes begins. It turns out that drive-thru lanes without menus and cashiers isn’t only a convenience that customers love. They are also really good for sales and margins, too.
Stores with Chipoltlanes exceed the sales performance of lane-less stores by 18%-20%. Margins are 5%-6% better due to kitchen efficiencies and those faster drive-thru times. Kitchen orders sorted digitally mean control over unexpected surges and less waste. And the convenience of lanes has translated into a noteworthy decline in customers requesting delivery, a profit margin sinkhole.
Niccol told a Morgan Stanley analyst last week that the company is on track of have about 150 Chipoltlanes operational at the end of this quarter, versus 2,700 stores overall. The company is adding “lanes” to approximately 60%-70% of new stores going forward and exploring ways to retrofit existing locations.
All of this fits into a bigger plan to transform the business with digital strategies. Managers are using traditional customer relationship management, like targeting and rewards to drive sales. They are also making stores more efficient with Chipoltlanes. Niccol says most of these strategies will be a tailwind in the back half of 2021.
Chipotle shares have risen 59% in 2020. At 62.2x forward earnings and 6.3x sales investors are clearing putting the business in the same league with Starbucks and McDonalds. That’s a fair comparison yet, in my opinion, Chipotle is doing digital better and the story has longer to play out as the company adds more locations.
Based on sales growth and the potential of Chipoltlanes, shares could easily trade to $1,600 during the next 12 months, a gain of 20% from current levels. I’m not adding it to our portfolio at this time, but it fits our theme and has tons of potential.
Learn more about Jon Markman at Pivotal Point.
