Chipotle’s Turnaround Plan Arrives With a Thud

Shares of Chipotle Mexican Grill (NYSE: CMG) rocketed higher earlier this year when Taco Bell veteran Brian Niccol was named CEO of the struggling fast-casual chain. But now there seems to be a bit of buyer’s remorse.

Chipotle’s turnaround plan, revealed on Wednesday, includes some big changes. On top of closing underperforming stores, the company will refocus its marketing, invest more heavily in digital ordering, and roll out a new loyalty program next year. Rebuilding the brand and improving operations at existing restaurants are the orders of the day.

The plan came with few concrete details, and no indication of when Chipotle’s financial results would turn the corner. The market wasn’t thrilled, sending the stock as much as 9% lower Thursday morning.

Shedding stores

Chipotle has expanded rapidly over the past few years, helping to boost sales at a time when existing stores were struggling with the aftermath of the food safety crisis of 2015. It operated 2,408 restaurants at the end of 2017, up from just 1,230 six years earlier.

Chart by author. Data source: Chipotle.

The company now plans to shutter as many as 65 underperforming locations as part of Niccol’s plan. These store closings, along with the recently announced headquarters move and other restructuring actions, will lead to charges between $115 million and $135 million.

Chipotle will likely now be more disciplined with new stores after years of breakneck expansion. Niccol said in the press release announcing the plan that he “can easily see a future where Chipotle more than doubles the business to $10 billion in revenue.” That future is probably a long way off, as it would require thousands of new locations.

Building the brand

Chipotle’s brand was tarnished by the food safety crisis, and it never fully recovered. Niccol plans to revamp the company’s marketing efforts, aiming for Chipotle to become “a more culturally relevant and engaging brand to grow love and loyalty.”

That’s going to require heavier marketing spending, which could pressure the bottom line. The company has already tried boosting its spending, nearly doubling its marketing budget in 2016 compared to 2014 in the immediate aftermath of the food safety crisis. It didn’t solve the company’s problems.

Chipotle will need a new message, one that gets people excited about the brand again. During the conference call about the plan, Niccol summed up the issue: “There was a general lack of customer understanding. Our marketing dollars had been inefficiently allocated.”

On top of the marketing revamp, Chipotle plans to roll out a new loyalty program next year. The company tried a limited-time loyalty program back in 2016, but it now appears Chipotle is ready to get more serious about rewarding frequent customers. The company provided little in the way of details, but I would expect the new program to be deeply integrated with the company’s digital ordering system.

Image source: Chipotle.

Betting on digital

Though Chipotle already offers mobile ordering and pickup through its mobile app, Niccol believes this part of the business is far from reaching its full potential. “We believe our digital business has a long runway for growth and ultimately can be a multi-billion-dollar business,” Niccol said in the press release announcing the plan.

Its digital sales are currently around $500 million annually, less than 10% of total sales. What’s worse, Niccol said that more than half of customers aren’t aware that the mobile order option exists. Better marketing will help solve that problem, but the company also has work to do making the experience better.

Chipotle’s mobile app got a redesign late last year, and it works well in my experience. But the pickup process has its flaws. Niccol said that one big problem is that it’s not clear where orders should be picked up. That issue is compounded when the restaurant is busy. The company is testing out pick-up shelves that make it more obvious, which should help streamline the process.

Chipotle is also working to integrate delivery via third-party services into its app. It can already be ordered through DoorDash, Postmates, and Tapingo, but the lack of app integration fragments the experience. The company plans to test out delivery through its app, and it hopes to roll out the feature to as many as 2,000 locations by the end of the year.

A long road ahead

On top of all the announced changes, Chipotle is also testing out new menu items, including quesadillas and milkshakes. The company provided no indication of when or if these items would be introduced nationwide.

It’s clear from Chipotle’s plan that Niccol sees a lot of problems with the fast-casual chain. He was unable to provide any sort of timeline, saying that “it’s too early to predict the timing and precise impact each of these strategies will have on results.” But he added that he believes these initiatives “will lead to higher average unit volumes and margins in the future.”

When that future will arrive is anyone’s guess.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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