Chipotle to Close 55–60 Restaurants in Revamp Plan

Much of Chipotle’s renewal strategy will fall under the “go slow to go fast” model, executives explained Wednesday afternoon during a special investor call. And getting there isn’t going to come without some early kickback.

The brand announced it would shutter between 55–60 underperforming restaurants, including the five Pizzeria Locales located outside of Denver. About half of these closures will take place within the next 30 days, and the remainder over the coming “several quarters” as Chipotle negotiates lease buyouts with its landlords.

Additionally, costs from corporate restructuring are expected to cause Chipotle to take between $115–$135 million in charges—$50–60 million of which will occur in the second quarter.

The call was intended to inform investors about Chipotle’s plans to refresh and reinvigorate its brand under new leadership. CEO Brian Niccol, the former Taco Bell leader who arrived in early March, hosted his first earnings call in April, but withheld many growth details in anticipation of Wednesday’s reveal. Chipotle shared several initiatives, including a plan it calls “Winning Today and Cultivating a Better Future,” but also remained vague on a few topics, such as its international plans, capital allocation in regards to share buybacks, and providing any concrete menu plans in regards to reports that quesadillas and nachos were being added to the menu. In response, investors sent the stock down 3.1 percent in after-hours trading. Chipotle’s share price, however, is still up more than 80 percent since Niccol’s hiring was announced in February.

The digital conversation was a big part of the call, and Chipotle shed light on key initiatives. The first was “in-app” delivery of its food to 2,000 restaurants by the end of the year. Next was the arrival of its long-awaited loyalty program. Digital sales are about $500 million, or about 9 percent of total sales currently.

Chipotle announced a delivery deal with DoorDash in April that expanded the service to more than 1,500 restaurants, and delivery orders lifted 700 percent in the first week.

“Later this summer we will add delivery capabilities to our app so the fastest way to deliver Chipotle to your chair is a couple of clicks away,” Niccol said in the call.

Curt Garner, Chipotle’s chief digital and information officer, said the brand is excited about the launch, and is a learning organization now, not one that just rolls out products and strategies without deliberate testing. “It’s early days,” he said. “We’re excited to see how customers respond and how we can continue to make digital the easiest way to Chipotle.”

In regards to the loyalty program, Niccol said they plan to test a program in the second half of this year, “leading to a planned national launch in 2019.”

“Our loyalty program will give us a currency with which to incent and reward trial and new behaviors,” Niccol said.

He said once Chipotle gets that going it can move to tailored-data specific marketing to drive certain behavior, and then offer specific products and experiences. “We think that’s going to be a key unlock for the business going forward,” he said. “Because as this business goes from 10-percent-plus in digital sales that presents an opportunity for us to have more customers in our business engaging at a different level than they have in the past. When you layer on top of that a loyalty program with a strong CRM engine, I think really exciting things will be unlocked as we roll out loyalty on a national basis in 2019.”

"Our ultimate marketing mission is to make Chipotle not just a food brand, but a purpose-driven lifestyle brand. … Chipotle will become a brand that people want to know about, want to be a part of, and want to wear as a badge.” — Chris Brandt, Chipotle CMO.

Chipotle also spoke to length about its new digital-order pick up shelves. Niccol said it’s unclear in many restaurants where to pick up take-out orders, which detracts from the experience. In a downtown Denver restaurant, Chipotle cut a window into the wall near the kitchen door, not far from the register, and put a digital pick-up sign above it. That change caused a double-digit increase in the store’s digital sales within the first few weeks. Niccol said it served as in-store marketing and raised awareness. This represents a big opportunity, he added, since research has shown that more than half of Chipotle’s customers aren’t aware they can even order ahead for pick-up.

The brand looked into adding these types of windows but realized it wasn’t logistically feasible. The response: Self-serve shelves and a sign overhead. These could roll out faster and more cost effective.

“We have digital pick-up shelf prototypes in a handful of restaurants as we speak, and expect to expand into another test market this summer,” Niccol said. “These shelves unlock the power of our second make-line and accelerate our digital sales flywheel to drive more mobile and delivery orders, and more group orders in addition to increasing peak capacity in our restaurants by providing a relief valve for our very busy customer-facing service line.”

Chipotle is adding flat screen TVs at some food prep lines as well to replace printed digital orders and improve employee productivity.

Niccol did touch on menu changes, although it wasn’t as defined as some investors hoped. He even hinted chorizo could possibly make a comeback.

A significant change Niccol noted was the addition of a Happy Hour to enhance Chipotle’s value proposition during non-peak snacking hours with $2 tacos with a drink between 2–5 p.m. “We’re also exploring a similar offer for increased late-night sales after 8 p.m.”

“We think about menu innovation in four key ways,” he said. “No. 1, what do our customers tell us they want, like nachos and quesadillas [that] we’re experimenting with in the test kitchen. No. 2, items our customers tell us they want to bring back, like chorizo. No. 3, new items that can be unique to Chipotle, like the frozen Mexican chocolate milkshake, and the avocado tostada that are also in the test kitchen. And finally, No. 4, celebrating exciting items that are already in our restaurants.” Niccol mentioned the shredded tofu Sofritas as an example.

Chipotle also said it was reorganizing its operational structure to remove layers. This is the main driver in the aforementioned $115–$135 million charges.

“We have flattened the organization with the removal of layers, which when combined with clear roles and responsibilities will speed up decision making and drive better results,” Niccol said. “We’re putting in place a clear governing structure for the organization to enable efficient execution. Importantly we will build muscle around innovation by establishing a stage-gate process where we test, learn, and iterate. So when we roll out a new initiative we are highly confident in the probability of success.”

Marissa Andrada, the brand’s new chief human resources officer hired in April, said Chipotle’s new organizational structure, aligned with the Newport Beach, California, and Columbus, Ohio, support centers, would provide “world-class service levels to our restaurants.” Also, it’s streamlining the structure to eliminate two layers to “stay nimble and agile as we grow. Allowing us to reinvest in new capabilities and skills.”

Branding was a big focus of the call as well. Chris Brandt, formerly the executive vice president and chief brand officer at Bloomin’ Brands’ Outback Steakhouse, Carrabba’s, Bonefish Grill, and Fleming’s, who joined March 20, said Chipotle is working on a new tagline and cultural narrative.

“There is such a unique emotional component to this brand stemming from its authenticity and transparency about food that we need to reinforce and reignite,” he said. “To that end our ultimate marketing mission is to make Chipotle not just a food brand, but a purpose-driven lifestyle brand. … Chipotle will become a brand that people want to know about, want to be a part of, and want to wear as a badge.”

“I can easily see a future where Chipotle more than doubles the business to $10 billion in revenue,” Niccol added in a statement. “We will execute flawlessly in our existing restaurants, add more high-performing restaurants, build brand relevance and engagement, expand digital capabilities for team members and customers, and build an organization with top tier talent that can win today and cultivate a better future.”