Chipotle Mexican Grill‘s (NYSE: CMG) new chief executive, Brian Niccol, took the helm of the fast-casual pioneer in early March. While he hinted at some of his plans for the brand on the company’s first-quarter earnings call in late April, Niccol unveiled his complete strategic plan during an analyst call on Wednesday afternoon.
Chipotle shares plunged more than 6% on Thursday, suggesting that investors weren’t entirely pleased with what they heard. That said, Chipotle stock had surged by 87% between February 13 — when the CEO appointment was announced — and the end of last week, so Niccol may have needed to walk on water to meet investors’ lofty expectations.
However, leaving aside the expectations game, Niccol and his management team presented a promising turnaround plan. The plan will take time to gain momentum, but over the next several years, it should drive a much-needed rebound in sales growth and profitability at Chipotle.
Major changes on the horizon
While Chipotle’s management team discussed numerous initiatives to reignite growth and boost profitability, four seem particularly important: menu innovation, updated marketing, the introduction of a loyalty program, and a greater emphasis on digital sales.
First, Chipotle recently began testing several potential new menu items at its test kitchen in New York: “quesadillas, nachos, chocolate milkshakes, avocado tostadas, and a new salad.” Chipotle will also try offering a $2 happy hour taco special between 2 p.m. and 5 p.m., in order to drive “snacking” traffic during the slower afternoon hours.
In general, Niccol wants Chipotle to develop and test new items continuously. However, there will be a rigorous process governing the rollout of new items. They will first be tested in a handful of Chipotle restaurants to ensure that customer reception is positive and throughput remains high. Only after new items meet those hurdles will they go national. This process could take 18 to 36 months in many cases, particularly if the items require new equipment.
Second, Chipotle is making big changes to its marketing strategy. Niccol and Chris Brandt — Chipotle’s new chief marketing officer — found that the company hasn’t been allocating its marketing dollars efficiently. Going forward, Chipotle will lean more on TV spots, which it barely used in the past. They also believe that the company’s ad campaigns need to be more engaging and lighthearted.
Third, Chipotle will finally launch a permanent loyalty program, which will be tested in late 2018 ahead of a full rollout in 2019. The details still need to be worked out, but the program will reward purchases whether made in-store or through the Chipotle app. Like many loyalty programs, Chipotle’s program will be designed to incentivize customers to visit more frequently and try new items, and it will enable personalized “one-to-one” marketing.
Fourth, Chipotle will work to raise awareness of its much-improved mobile app. The company is partnering with third-party delivery services to enable delivery from most of its restaurants, and by year-end, customers will be able to order delivery from within the Chipotle app in most locations.
Chipotle is also equipping restaurants with mobile order pickup stations to make it easier for customers to find their food. A side benefit is that the stations advertise the availability of mobile ordering. In the long run, Chipotle sees digital sales as a multibillion-dollar opportunity. For comparison, digital sales didn’t even reach $500 million last year.
Investors wanted more detail
The main gripe from analysts who participated on the call last week was that management didn’t say much about current sales trends and didn’t offer enough details on the proposed initiatives.
For example, Chipotle did not provide any earnings targets or estimates of the impact of the various initiatives described on Wednesday. Additionally, the expected timing of the hoped-for turnaround remained unclear. Given that Chipotle stock traded for more than 50 times analysts’ 2018 earnings estimates prior to the analyst call on Wednesday, it’s easy to see why investors walked away unsatisfied.
This is a solid plan
While investors’ frustration is understandable, it wasn’t realistic to expect a firm timeline and dollar amounts for the impact of each initiative. For example, Chipotle’s disciplined approach to menu expansion means that management can’t say how many of the items it is testing will be rolled out to the full chain or when that will happen.
Similarly, it’s way too early to estimate the amount of sales growth that could be driven by better marketing. Chipotle is still months away from getting the final results of its customer research. Meanwhile, Chipotle’s proposed loyalty program will likely evolve as it is tested, complicating any estimate of its potential impact.
However, while management may not have provided firm numbers, it’s clear that the opportunity is enormous. Sales per restaurant would have to rise 30% just to reach the prior peak, which was achieved in 2015 with lower menu prices and much-lower volumes of catering and mobile orders, which can be prepared on a separate “make line.” In addition to boosting revenue, higher sales per restaurant would have a huge positive impact on Chipotle’s margin performance.
Chipotle is finally on the right track, with multiple promising initiatives in the pipeline to drive a return to strong sales and earnings growth. Investors who are willing to be patient for a few years could realize substantial gains.
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