Chipotle CEO Brian Niccol was asked Wednesday if the brand noticed any signs the industry’s flurry of value promotions had impacted performance. “We really haven’t,” he said. Rather, Chipotle is gaining share “every month” and seeing transaction growth from each income cohort as metrics strengthen spectrum-wide, including “value proposition.”
Niccol isn’t merely painting a rosy picture for appearance’ sake. Chipotle in Q2 posted same-store sales gains of 11.1 percent, well ahead of Wall Street’s consensus prediction of 9.2 percent. And perhaps more notably, 8.7 percent stemmed from transaction growth—the brand’s strongest traffic result in three years. For reference, the entire quick-service industry, according to Revenue Management Solutions, witnessed traffic declines of 2.3 percent in Q2, year-over-year, thanks to rising prices and a cautious consumer. Chipotle outpaced the field by double-digits.
Its Q2 traffic was a sequential acceleration on both a one- and two-year basis.
Chipotle will roll off about 3 points of pricing in Q4 as it laps a year-ago increase and hopes to not take any more price for the rest of the calendar, CFO Jack Hartung told investors. The brand had another 1 percent effective in response to California’s FAST Act. But it appears things are stabilizing.
There was negative mix of 1 percent in Q2 mostly from group size, which was down about 2 percent and offset by add-ons—chips, queso, and extra meat.
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As for what’s driving that outlier traffic performance, it’s a broad, long-term discussion as well as a ground-level one that’s evolving in real time.
Q2’s comps climbed highest in April thanks to a favorable Easter shift, the return of Chicken Al Pastor, and a robust promotion around National Burrito Day. The company launched an interactive game, Burrito Vault, to give away 100,000 BOGO entrée codes. Customers were challenged to guess two exact order combinations, ingredient by ingredient. The first 50,000 users who deciphered the code on April 2 and April 3 received prizes to redeem on April 4. Chipotle set its best sales day in history—in store and digital. Niccol said the gamified promotion generated an influx of new and lapsed customers as well; it was Chipotle’s top enrollment day of the year thus far for a rewards program that’s swelled beyond 40 million members,
Same-store sales settled to roughly 6 percent in June (3–3.5 percent traffic). Management also noted July trends were choppy due to the timing of July 4th and Hurricane Beryl in Texas, with underlying trends suggesting about a 6 percent comp with 3 percent traffic.
Essentially, Q2’s jolt was a marketing and product win (Chicken Al Pastor reached a 20 percent incident rate and pushed incremental transactions and spend, Niccol said). Yet it was also a layer atop ongoing efforts.
Firstly, getting back to the ever-present value angle, Chipotle has faced its share of social media chatter in recent months over what some customers claim are shrinking portion sizes. There was even a hack going around that you could film the order-marking process to ensure employees scooped more out of fear of being caught on camera doing otherwise.
This didn’t really seem to dent the brand’s bottom line—the chain reported same-store sales of 7 percent in Q1—but it was an issue Chipotle wanted to tackle nonetheless, Niccol said, adding “there was never a directive to provide less to our customers.”
“’Generous Portion’ is a core brand equity of Chipotle,” he said. “It always has been, and it always will be.”
That said, he admitted feedback led Chipotle to reexamine operations to ensure shrinkflation wasn’t, in fact, happening. Niccol said about 10 percent of stores, through portion scores on consumer surveys, were identified as outliers in need of retraining and re-coaching on “what we believe are the right standards.”
That overall message of abundance, though, mega-phoned across the entire fleet. “Our guests expect this now more than ever, and we are committed to making this investment to reinforce that Chipotle stands for a generous amount of delicious, fresh food at fair prices for every customer [and] visit,” Niccol said.
“We don’t want to take something that’s been a positive for all these years and then have it turned out to be a negative because of some of the social media commentary,” added Hartung, who is retiring in March after nearly 25 years with the company. “So, we’ve made this investment, we’ll continue to make the investment. We already have a number of initiatives underway. Some of them are operational. Some of those are supply chain efficiencies.”
Niccol said there has already been a noticeable uptick in consumer sentiment, which goes back to the brand’s ability to insulate through inflationary and promotional heavy times. Chipotle wants to reinforce the company’s quality and portion equity rather than adjust it.
And it’s going to narrow margin somewhat.
Chipotle posted restaurant margins of 28.9 percent in Q2, up 140 basis points from last year and 50 basis points ahead of BTIG estimates thanks to sales leverage. Executives, however, suggested this could be the new high-water mark as margins face pressure through the second half of 2024. Chipotle excepts Q3 numbers to be about 25 percent—a combination of protein mix shift due to Smoked Brisket swapping in for Chicken Al Pastor as an LTO, higher dairy and avocado prices, and the aforementioned investment in larger portions.
Brisket is the most expensive protein Chipotle has offered. When it last hit the menu in fall 2021, William Blair said it was priced more than 10 percent higher than steak/barbacoa and 30 percent above chicken. While costly, it was a transaction driver (Chipotle sold out of it in November of that year). William Blair expects that positive response to be the case again, holding the promise of jumping Q4 comps 2 to 3 percentage points assuming a 10–15 percent penetration rate. The plan for Chipotle is to keep the LTO into Q1, and it bought more product in anticipation this go-around.
Niccol said it took a “huge cross-functional effort across supply chain, culinary finance, and marketing” to bring the item back, which features smoked beef, charred on the grill, and finished with a brisket sauce made with chili peppers.
The wider view
These recent developments are bouncing off a foundational fix Chipotle started to address publicly last year under the banner of “Project Square One.” As the name suggests, it’s nothing complex, at least in terms of theme. The brand realized tactics through COVID unbalanced digital and in-store execution. Getting the right people on the correct line, with performance tools, was step No. 1. That’s continued to drive efforts around throughput as Chipotle targets $4 million AUVs and beyond.
Niccol calls the larger approach “running successful restaurants.” These throughput improvements, he said, positioned the brand to meet the demand it saw in Q2 during “burrito season” and peak seasonality, as well as Chicken Al Pastor.
He said Chipotle is often asked why throughput is such a vital operational KPI. “It is the outcome of a strong operational engine that delivers a great experience for our teams and our guests,” he said. “In order to deliver exceptional throughput, restaurants need to be fully staffed and properly deployed.”
Crew must complete food prep on time and be trained to deliver when the rush arrives, he added. For guests, it’s about faster lines and hotter, fresher food. “This type of guest experience strengthens our value proposition and drives incremental transactions,” Niccol continued.
Over the last year, as noted, Chipotle improved tools and training within this operational sphere. That’s included rightsizing the cadence of digital orders during peak periods and enabling restaurants to see in real time at the point of sale the number of entrees in each 15-minute interval. On some level, Chipotle gamified crew-level execution. Niccol said teams celebrate in the moment when goals are hit, which is something that happens daily versus reflections at say, the end of a quarter, or even a shift.
GMs under this structure also coach when things go astray, he said. In one example of how it’s resonating, a fielder leader in New York had five of eight restaurants achieve their throughput goal in Q2. Last year, it was one.
Chipotle said it’s entrée throughput in Q2 was in the mid-20s range per peak 15-minute period, a visible improvement from low-20s in 2023.
Yet there’s still runway. Restaurants with an expo in place—the crew member who helps expedite bagging and payment—are averaging five incremental entrees in their peak 15. But only a shade over half of Chipotle units have one during surges. “This is certainly better than where it was a couple of quarters ago,” Niccol said, “but should be a lot higher.”
In other terms, Chipotle could go from low 20s in 2023 to high 20s by raising the proportion of units with expeditors from about 50 to 70 percent-plus—a number it’s reached before.
“I’ve said this over and over again,” Niccol noted. “The thing that we need to make sure we do really well is great culinary, great burritos and bowls, and treasure every single guest that comes into our restaurants, whether it’s in-line or online. And when we do that, we see our value scores [rise] and our brand become more loved.”
On the innovation front, and further growth
Niccol also provided an update on a few of Chipotle’s upcoming initiatives. The brand’s dual-sided grill upgrade tested in 10 restaurants over the past year. It cooks chicken and steak in roughly half the time it takes on Chipotle’s plancha, with consistent execution and the same sear and char, he said. “It also maintains better moisture, resulting in juicer chicken and steak with less waste,” Niccol added.
For teams, it takes one of the most complex roles in the restaurant and improves the learning curve. The equipment opens capacity and bolsters efficiency at high-volume units during morning prep since chicken and steak can be cooked closer to serving. All said, Chipotle is now in the process of rolling the dual-sided grill to an additional 74 restaurants this year and will continue evaluating where it goes next.
Additionally, Chipotle’s automated digital makeline with Hyphen, and the avocado-prepping “Autocado,” are making their way through final checks ahead of being tested in their first live restaurants. Chipotle said the Autocado could potentially cut guacamole prep time by 50 percent (from about 50 minutes per batch presently). Hyphen, William Blair noted, “holds significant potential to unlock additional throughput and labor efficiencies as bowls account for roughly 65 percent of sales).” Hyphen should arrive in late August or early September.
Chipotle opened 52 company-run units in Q2, including 46 with the order-ahead pickup “Chipotlane,” as well as an international licensed restaurant. The company expects to bring 275–315 new stores to market in fiscal 2024, with 80 percent of those featuring a Chipotlane.
The international partnership with Alshaya Group brought Chipotle’s first licensed store to Kuwait, which has been open for a few months and “continues to have strong performance,” Niccol said. The location was Chipotle’s first new country entry in 10 years and features kiosk and QR codes—that digital-centric design format was also a debut for the brand. A second Kuwait store is in the work alongside expansion into Dubai.
