In an effort to counter slowing same-store sales, Chipotle Mexican Grill (CMG) will be bringing its famous burritos to customers’ doorsteps.
CMG stock has been stuck on a plateau for the better part of a year now, and part of the reason for that has been sluggish comps growth. In response, the burrito maker recently announced an agreement with Postmates to deliver in 67 cities.
Delivery is just another way to get Chipotle’s food in the hands of customers, who have proven that … well, they do love Chipotle’s food.
On its face, Chipotle delivery looks like it should put CMG stock back on a more north-facing path.
As mentioned above, Chipotle Mexican Grill is partnering with Postmates, an Uber-style service that coordinates over 10,000 independent delivery drivers. Postmates, which can be contacted through an app, will arrange delivery of goods or food from stores directly to customers for a fee — in this case, the fee on Chipotle delivery will be capped between $4.99 to $7.99 depending on the the distance.
While Postmates only started up in 2011, it has plenty of experience delivering to customers; Postmates completed its 1,000,000 delivery in December 2014.
Other eateries announced they are looking to similar services later in the year, a tacit signal that Chipotle delivery is a good idea. Starbucks (SBUX) will use Postmates as well in Seattle and New York. CMG’s Mexican fast food competitor, Taco Bell — a Yum Brands (YUM) division — announced it will test a delivery service as well.
As a note, this isn’t Chipotle’s first rodeo with deliveries — other third-party services have tried to deliver CMG orders in the past, but Chipotle shut them down, citing quality and procedural concerns.
The delivery push is just one of a number of ways in which Chipotle is seeking to leverage technology to bring in orders. Other examples include CMG utilizing the mobile payment features through Apple’s (AAPL) Apple Pay and Google’s (GOOG, GOOGL) Google Wallet, as well as mobile ordering through its new Apple Watch app.
Why Go Out of the Way?
Considering Chipotle has some 1,800 stores, why would CMG need to start delivering? Anyone who craves a burrito is close to a store, right?
Maybe, but regardless, Chipotle is suffering from disappointing same-store sales growth. CMG reported comps growth of 10.4% in the first quarter of 2015, which fell short of the analysts expectations of 11.8%. That figure also was lower than the 16.1% growth seen in Q4 2014, as well as 16.8% growth across fiscal year 2014. Moreover, Chipotle management projected merely low to mid-single-digit same-store sales growth for the rest of the year.
CMG stock reacted to this news with a roughly 7% decline, which puts Chipotle roughly the same amount in the red for 2015.
Some of Chipotle’s slowdown came thanks to bad weather and its suspension of a pork supplier that failed to meet CMG’s animal welfare standards.
This year’s winter weather was prolonged and impacted all restaurants, not just CMG. The burrito maker estimated that bad weather accounted for a loss of 100 to 200 basis points. It’s likely as the weather improves, so will CMG’s business.
The suspension of pork sales was met with customer support, even the carnitas-loving ones. CMG doubled down on that support by announcing it will no longer use GMO ingredients. However, carnitas-loving customers were reluctant to switch over to another protein, which meant that CMG could not recoup the lost sales through other means. The suspension of pork sales hit Chipotle to the tune of 200 basis points.
Will It Deliver?
It’s too early to tell, but CMG piloted the service with Postmates before formalizing the partnership. The pilot Chipotle delivery program saw 30% month-over-month sales growth to the tune of $500,000 in orders alone in the last quarter.
Chipotle is looking to replicate the pilot’s results through the expanded service, and if it can, expect a return to stellar sales growth and a pep in the step of CMG stock.
As of this writing, Johnny Chen did not hold a position in any of the aforementioned securities.