Chipotle is Headed to a Small Town Near You

    Fueled by surging sales and Chipotlanes, the brand believes it can reach 7,000 North America locations.

    Fast Casual | February 9, 2022 | Danny Klein
    Chipotle exterior of a restaurant with a garden.
    Adobe Stock
    Chipotle expects to bring 235–250 restaurants to market in 2022.

    Chipotle’s 2021, COVID dynamics and all, signaled the end of an era. The brand transitioned from a turnaround phase to a sustainable growth one, CEO Brian Niccol said Tuesday in a conference call. The kicker: 1,000 more restaurants across North America.

    Chipotle now believes it can operate at least 7,000 stores, up from prior projections of 6,000 and a canyon away from the vibe hugging the brand when Niccol joined in winter 2018, taking over for founder Steve Ells. Just for Wall Street juxtaposition, Chipotle traded for $314.72 on February 1, 2018. On Wednesday, the brand was up to $1,562.26 by mid-morning.

    Why Chipotle lifted its growth ceiling credits to current performance, continued expectations, but also something more visible. In recent years, Chipotle’s small-town success opened the map. Niccol said these restaurants deliver unit economics “at or better” than traditional locations. They also lend themselves to the brand’s order-ahead pickup window “Chipotlanes,” which continue to outperform units without them. They produce higher volume, skew toward digital (namely the higher-margin takeout occasion), and generate cash-on-cash returns in the 65–70 percent range within a couple of years.

    Small-town Chipotles open at higher margins in general, Niccol said, because the cost of the lease is lower. As noted, there’s no trade-off in volume. “Actually,” he said, “it’s probably an outsized, call it, revenue or sales.”

    So lower fixed costs, and Chipotle also lands as “an employer they want to be a part of,” Niccol added. There’s a high success rate in staffing.

    Niccol said North America boasts “hundreds of these” the brand can easily find and build. Chipotle is talking towns with 40,000-plus people, which isn’t tiny, but is “small” by the brand’s historic marks. And CFO Jack Hartung added Chipotle could go smaller if it’s on an expressway or something similar.

    “But I think the key is that these are restaurants that are not in a metropolis,” he said.

    One element Chipotle will key an eye on, however, is ensuring its footprint doesn’t stretch too far apart. Hartung said they want to avoid a scenario where field leaders need to travel, say, 300 miles to get to a remote location. They’d rather piece small towns together where there’s one 50 miles away and another 50 miles away, he said. “You string these along so that a field leader can, over a number of days, make sure that he gets touches with those restaurants, develops the leadership in those restaurants from a financial standpoint,” Hartung said. “And from bringing a special dining experience to small towns, it’s a home run.”

    Chipotle is well on its way. The brand opened 215 new restaurants in fiscal 2021 and 78 in Q4 alone—67 of which included a Chipotlane. For the full year, 81 percent, or 174, showcased the feature, and Chipotle ended the calendar with 355 across the system, including 16 conversions and 11 relocations.

    The brand expects to bring 235–250 restaurants to market in 2022, and more than 80 percent of those will be equipped with a Chipotlane. The guidance includes five to 10 relocations to add one.

    READ MORE: Inside the Rise of the Game-Changing 'Chipotlane'

    Going further, Niccol said the chain is developing a real estate pipeline that will allow it to accelerate unit growth 8–10 percent per year, with greater than 80 percent of new restaurants offering the pickup window.

    It's a massive redirect. Chipotle opened just 40 locations in the three-month period that ended December 31, or Q4 2018. The same timeframes ending March 31, June 30, and September 30 (all in 2019) saw openings of 15, 20, and 25 locations, respectively. In June 2018, Chipotle announced a revamp plan that included closing 55–60 stores. The chain had 2,408 restaurants on December 31, 2017 and 2,491 a year later. 

    At 2021 exit, there were 2,966.

    Chipotle’s fully corporate system benefited from another stretch of robust performance, even with margins and omicron pressures complicating the picture. Total revenue in 2021 upped 26.1 percent to $7.5 billion. Same-store sales climbed 19.3 percent and digital sales upped 24.7 percent (45.6 percent of the business).

    In Q4, revenue rose 22 percent, year-over-year, to $2 billion, and comps hiked 15.2 percent. Digital sales, even against 2021’s skyrocket, ticked up 3.8 percent to 41.6 percent of sales ($811 million, with delivery mixing about 20 percent).

    For reference, Chipotle’s full-year digital sales of $3.4 billion is nearly three-and-half times what it reported pre-COVID in 2019. And this despite the fact two-thirds of guests still use in-restaurant as their exclusive channel, Niccol said. The group deploying both digital and in-store remains relatively small. “I think if we get those people to have a really positive experience using the rewards program, it’s just a tremendous unlock for what the rewards program can grow to be,” Niccol said. On that front, Chipotle today has more than 26.5 million loyalty members. It touted 8.5 million in February 2020.

    Operating margin was 8.1 percent, an increase from 7.3 percent, and restaurant-level operating margin clocked in at 20.2 percent (70 basis points higher).

    Average-unit volumes are up to $2.641 million from $2.223 million two years ago.

    Also to consider, as of December 31, Chipotle had $1.4 billion in cash, investments and restricted cash, and no debt, as well as access to a $500 million untapped credit facility.

    Omicron's impact did pulse in January, as same-store sales increased just 5 percent over prior-year. And Chipotle expects comps in the mid- to high-single digits during Q1.

    Niccol said opening 215 restaurants in a pandemic landscape “wasn’t an easy thing.” Part of the challenge, as in the case throughout the country in sectors of all kinds, especially those that lean on hourly labor, was staffing. How will that play into the 7,000 goal?

    Niccol said expanding Chipotle’s labor pool runs alongside its unit count. During 2021, 90 percent of the brand’s restaurant management roles were internal promotions. That measures to about 19,000 people. “The reason why that's important is it's a lot easier to prepare for 300 openings when you're working off of the base of 3,000 or 4,000 [restaurants],” Niccol said. “Or whatever number of openings we want to achieve, the bigger our base is, the more talent we can develop. And I think we're demonstrating we can develop that talent with the fact that we just promoted 19,000 employees. So they'll stay with us. They'll grow with us. They're excited about the growth opportunity.”

    The brand took a labor cost hit of 100 basis points in Q4, up to 26.4 percent, as it lifted average nationwide wages to $15 per hour in May.

    Chipotle offset the cost, as well as commodity pressures (namely, beef inflation and freight, to a lesser extent), with a 4 percent mid-December menu price increase that gave the chain about 10 percent of price in January. Niccol said Chipotle could take additional pricing if costs don’t abate.

    “It’s really the last thing we want to do,” he said, “but we’re fortunate that we can pull it. And we see no resistance to date with the levels that we’re currently at. … The chicken burrito for most parts of the country is still less than $8. Chicken bowl is still less than $8. And that’s phenomenal value.”

    Chipotle is in the process of implementing a new digital scheduling program and upgrading its learning management portal. The former uses artificial intelligence and analytics that looks at real-time metrics and helps employees prep accordingly. “We should then end up in a scenario where we don’t run out of guacamoles at the end of the day, right?” Niccol said.

    “How do we help our team members know when to cook more chicken throughout the day,” he adds. “When to make guacamole and how much guacamole to make after lunch because we want to be in the Chipotle business from open to close.”

    Niccol said Chipotle is exploring technology, whether its robotics or automation, that sheds “jobs people frankly don’t love doing.”

    As Chipotle grows, it also plans to aid marketing with a cadence of two to three new menu items per year. In 2021, there was cauliflower rice, quesadillas, and smoked brisket. Plant-based chorizo, which Niccol said is off “to a terrific start,” kicked off the current year. Pollo Asado, Chipotle’s first chicken innovation in the chain’s 28-year-history, is on deck.

    “As I've said before, challenges create opportunities, and we are now in a much stronger competitive position than we were two years ago,” Niccol said.