How COVID-19 Could Change Chipotle as We Know It

    Delivery, rewards, drive thru, and order-ahead are all picking up. Can the fast casual keep new guests when the crisis passes?

    Customers gather around to eat Chipotle.
    Chipotle
    Delivery is the fastest-growing part of Chipotle's digital platform.

    Chipotle CEO Brian Niccol believes fatigue has set in. Consumers worked their way through stocked-up pantries. They bought too much food and had to throw some away. They’re tired of cooking. Combine that with stimulus money and tax refunds coming in, and restaurants suddenly have a chance be a solution for stir-crazy people instead of a forgotten pastime.

    And that, fundamentally, this is what’s infusing optimism into this crisis period. Chipotle’s surge in digital business isn’t hurting, either.

    In Chipotle’s most recent week in April, adjusted for Easter, the brand’s same-store sales started to track in the negative high-teens range. It represented a relatively quick and significant jump, and also reflected just how difficult March was for restaurants of all stripes battling COVID-19 conditions.

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    Chipotle was off to a blazing start in Q1, despite lapping a 9.9 percent comp in 2019. Same-store sales ran at 14.4 percent, with nearly 11 percent transaction growth through the end of February, including a 1 percent benefit for leap year.

    But as stay-at-home directives became more prevalent, and states and cities began shutting down dining rooms, Chipotle’s sales deteriorated.

    Here’s how it progressed in March:

    • Week ending March 8: 8 percent
    • Week ending March 15: –4 percent
    • Week ending March 22: –34 percent
    • Week ending March 29: –35 percent
    • All of March: –16 percent

     

    Heading into April, Chipotle was sitting around negative 30 percent. And, as noted before, the trend was able to improve to the high-teens level this past week.

    Essentially, Chipotle’s Q1 comp flipped from plus 14 percent to negative 3.3 percent in a span of three weeks, with traffic declining 1.4 percent after progressing in the double-digits.

    Niccol said Tuesday in a conference call that roughly 100 of Chipotle’s 2,600 or so restaurants are currently closed, mainly inside malls and shopping centers, as well as 17 locations in Europe.

    The good news for Chipotle, though, is that it’s spent the past couple of years—really ever since Niccol took the reins in March 2018—ratcheting up digital. This went beyond signing up with aggregators (Uber Eats was added in March) and raising awareness, too. Chipotle’s digital transformation was as much an asset conversation as anything else.

    It included adding tech-enabled second make-lines into restaurants to handle increased order volume, building pick-up shelves, and even expanding development of drive thru “Chipotlane” locations—something that once seemed impossible for the brand.

    Chipotle’s Q1 digital sales grew 81 percent, year-over-year, to $372 million—its highest quarterly level to date—up to 26.3 percent of sales. For perspective, that’s more than quadruple what it was three years ago. And it’s been steady growth, not just a hit-the-top-button elevator ride from the bottom floor. In Q2 2019, the number sat at $262 million. The previous Q4, digital mixed only 12.9 percent of sales.

    Yet the COVID-19 window, and whether or not Chipotle can hold onto new digital guests, is where the focus turns. The brand’s March digital sales lifted 103 percent versus last year to 37.6 percent of sales. Niccol said a recent customer survey suggested about 15 percent of people had Chipotle delivered for the first time during the final two weeks of March.

    Month to date in April, Chipotle's digital mix is holding in the high 60s, he said.

    Since the beginning of April, in-store ordering is down (naturally) around 75 percent, CFO Jack Hartung added. Delivery is up 150 percent. Order ahead nearly 120 percent. Lately, digital has mixed more in the 70 percent range.

    Niccol said Chipotle has seen a slight pivot toward dinner, driven by social distancing behavior. “We're seeing a lot of positive things happening in our digital business,” he said. “It will be very interesting to see, as we are given the opportunity to start to open our dining rooms here in the next, call it, weeks or month, how we're able to continue to keep people engaged in our delivery business, our digital business.”

    The COVID-19 environment accelerated Chipotle’s rewards program as well. The fast casual introduced its long-awaited national platform about a year after Niccol started. It had 8.5 million enrolled members in February, which made it one of the fastest-growing programs in recent restaurant history.

    It’s now up to 11.5 million. Over the past month, Niccol said, daily sign-ups spiked nearly fourfold. Sixty-five percent of newly enrolled members are new to the Chipotle brand, up from 51 percent pre-COVID-19. Additionally, 61 percent of previous store-only rewards members are now new to digital versus 8 percent before the pandemic, Niccol said.

    While still early, Chipotle responded to this growth with personalized promotions intended to engage and incent behaviors. “We are seeing modest transaction increases across all frequency bands and expect this lever to become a bigger driver in the future as we gain greater customer insights while continuing to expand our digital ecosystem,” he added.

    Chipotle

    Up to 70 percent of Chipotle's near-term growth could include drive-thru lanes.

    The fact order-ahead daily sales doubled since COVID-19 provided Chipotle more fuel for its drive-thru shift.

    The company said its delaying nonessential reinvestments, including deferring all remodels that don’t involve a digital make-line or the addition of a Chipotlane. It’s also pulling forward those projects that still need the first feature.

    In Q1, Chipotle opened 19 restaurants, with 11 featuring a Chipotlane. During COVID-19, restaurants with a drive-thru lane have appreciated digital mix of roughly 80 percent. Also, the mix of higher-margin order ahead and pickup transactions more than doubled for those units compared to pre-COVID-19. And while Chipotlane opening sales were outpacing traditional units 5–10 percent before the crisis, they’re now higher by over 30 percent. A recent opening pushed day one sales of $15,000—one of the highest yet, the company said.

    Moving forward, less competition for new sites will likely lead to an even greater proportion of Chipotlane restaurants in the company’s pipeline, Hartung said. It could represent as much as 70 percent of the brand’s growth, up from previous projections of 55 percent. "I do think for this year, you'll see the percentage of Chipotlanes inch up," he said. "And then I think for next year, I think you'll see a stair step. ... certainly higher than 60 percent and maybe north of 70 percent as well. But we'll see. So far, the reaction from the landlords has been good. So we're very, very optimistic."

    Niccol added Chipotle won’t shy away from sites and the ability to pick spots best for its digital growth.

    Hartung said it’s probable rents will relax a bit out of COVID-19 as restaurants batten down their development plans. One thing that excites Chipotle: landlords that might have been resistant to add a Chipotlane in the past, perhaps thanks to having to redo the circulation around the property, might change their tune. “While they might have resisted that a bit in the past, we're not seeing much resistance of that anymore,” Hartung said.

    “… I have to tell you, if a developer is cash poor and they're looking to sell a site and if the price is right, we'll certainly be there, and we're willing to definitely buy that land, so we can lock in our occupancy costs forever,” he added.

    What Chipotle is doing, and how much money is going out the door

    In recent years, Chipotle has strengthened many of its food-safety initiatives in response to past setbacks. The company started conducting wellness checks before every shift and has trained nurses available to evaluate any employee who may feel ill in order to determine whether they should be excluded from work with full pay. It also installed advanced technology air purification systems to reduce the risk of viruses, supplied Purell sanitizer for employees and guests, mandated handwashing between tasks and at least every hour, required gloves be worn for all tasks, enhanced food preparation and food-handling practices, improved internal training and education, engaged a third-party consultant to perform regular inspections of all restaurants, and lastly, created an independent food safety advisory council compromised of category experts.

    And that was all pre-COVID-19.

    As coronavirus spread, Chipotle formed a cross-functional task force that holds daily calls, Niccol said. The chain implemented increased sanitation of high-touch, high-traffic areas, provided masks for employees, and added tamper-evident packaging seals for off-premises orders.

    Chipotle

    Chipotle's Queso Blanco launch was lifting Q1 results ahead of COVID-19.

    When dining rooms start to reopen, Niccol said, Chipotle expects these practices to continue. Employees will wear gloves. There will be a dedicated worker in the dining room sanitizing surfaces. Hand sanitizer will be available. Some things will likely move off the drink station.

    Niccol’s hope, though, is this transition runs alongside Chipotle’s digital boom. “And I think over time, some of these restrictions or behaviors will migrate back to the way it used to be. But the good news is our model is very durable in this environment for when we actually are able to open the dining room,” he said. “But we're going to be very specific on the actions we've taken in the restaurant to give people the confidence that they're having a healthy experience. But in the near term, it's going to be something that we're going to have to learn our way through.

    In terms of finances, Chipotle had $909.2 million in cash, restricted cash, and short-term investments as of March 31, with no debt. Chipotle said, while it doesn’t intend to use the Paycheck Protection Program loan provisions, it does expect to see a liquidity benefit of about $100 million from the CAREs Act primarily from deferring social security tax payments and accelerating tax deprecation in previous returns.

    In short, Chipotle has enough cash to sustain the brand for over a year as it stands today.

    The company bought back about $54 million of stock in Q1 and suspended its buyback program March 20, just a few days after dining rooms closed.

    With costs cut and hours shifted, Chipotle’s breakeven comp is just about negative 30–35 percent, Hartung said. And that includes recent employee investments, like the 10 percent assistance pay boost and nearly $7 million in discretionary bonuses for managers. Free delivery as well. Total, these moves cost Chipotle about $20 million in March.

    Chipotle’s ongoing cash burn currently is between $50 million and $60 million (cash G&A is tracking about $20–$25 million and CapEx $30–$35 million).

    But if the brand can keep comp declines in the high-teens, as it’s seen lately, restaurant cash flow would be in the black at $20 million, cutting that burn rate by about a third, Hartung said.