Three months ago, yours truly here was sympathetic to the plight of Chipotle Mexican Grill, Inc. (CMG). Punished for not knowing something that’s essentially unknowable, I argued that in time (albeit a good deal of time) consumers would forgive and forget the fact that the popular restaurant chain was the source of 55 E. coli cases.
Two months ago, I defended the company again, suggesting CMG was a long-term buy based on the restaurant chain’s unique and marketable menu even though it was acting more than a little desperate by giving away free food.
In light of the company’s announcement packaged with its earnings report, however, I’m starting to think Chipotle simply doesn’t understand the actual damage it’s suffered.
Its off-target repair work may be a tacit suggestion that the company’s management team just isn’t as skilled or in-touch as we may have thought it was.
Chipotle Toying With Chorizo
Last quarter, same-store sales for Chipotle Mexican Grill fell 30%, leading to a loss of 88 cents per share of CMG … a far cry from the $3.88 per share the company earned in the comparable quarter a year earlier. Revenue fell 23%, to $834.5 million, on a year-over-year basis.
Fans and followers will be quick to point out that the burrito chain still managed to top estimates for a per-share loss of 98 cents — but that’s not a terribly comforting beat in light of the bigger, lingering issue. That issue is, consumers still associate the brand name with the risk of contracting food-borne disease.
To combat waning sales, Chipotle is doing something it generally makes a point of not doing — it’s thinking about putting pork on the menu.
Technically, it’s the combination of pork and chicken, called chorizo, being considered. The ingredient option was tested in Kansas City last year, and was well-received. Chipotle didn’t seem overly excited about a nationwide rollout at the time, but in the shadow of a 30% plunge in same-store sales, nothing is off the table as a potential business-rebuilder.
Unfortunately, the introduction of chorizo won’t solve Chipotle Mexican Grill’s true problem.
Why It Doesn’t Matter
Chipotle co-CEO Monty Moran explained:
“(Chorizo was) very, very popular with our loyal customers … (and we believe will) make our loyal customers come more often.”
It sounds reasonable on the surface. There’s an potential flaw in the logic, however.
That flaw is, are there enough loyal customers left to bother with the addition of chorizo on a nationwide basis? Or, is it simply the case that the few customers who happen to still step foot in a Chipotle all prefer chorizo?
In other words, if 100% of your customers love chorizo, that’s a significant portion. What if, however, a store only serves 10 customers per day? That’s still not enough to achieve viability, even though the few fans it does draw are loyal.
It’s not my intent to oversimplify something Moran said; he’s probably right to suspect chorizo would be a compelling addition to the menu. On the other hand, Chipotle Chief Creative and Development Officer Mark Crumpacker recently said of what CMG customers preferred:
“I wish I had compelling data on that, because we certainly asked the question. … It’s just not something people can really answer. You basically get a hundred different answers. The most compelling thing is time. They just want – I just want to give it a little bit of time.”
If there is no clear answer to the question “What do Chipotle customers want?” how can anyone know they’ll care about chorizo?
Bottom Line for CMG
Be that as it may, the real red flag waving here isn’t the possibility that the company doesn’t actually know what it should be adding — if anything — to the menu to win customers back. The red flag is that the pinnacle of the strategic discussion thus far is a debate between serving chicken and pork separately, or serving chicken and pork together.
In the end, it really won’t matter that much.
What Chipotle needs to do to win back customers is much, much bigger. It may well involve a complete re-imaging and re-positioning of the company, if management doesn’t want to simply wait it out (as I would suggest) and let the E. coli wound heal on its own.
Whatever the case, my stance is the same … CMG is only a buy for the true long-termer, based on the strength of the concept and its food value.
Chipotle should be able to recover sooner or later, even though its leadership seems to be stumbling over itself in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.