Stock Market Analysis

How Chipotle Reinvented Itself

Chipotle is one of the most beloved chains in the U.S., yet only a few short years ago, the company was plagued by potentially ruinous health concerns. Here’s how it reclaimed its title as the king of Mexican fast food.

Back in October, Chipotle (NYSE: CMG) turned in its third-quarter earnings report, and the results beat Wall Street’s estimates across almost every relevant metric. While revenue was about in line with analyst projections, earnings per share and same-store sales easily surpassed expectations.

As we look back on a hugely successful year for the burrito chain, it’s worth remembering that as recently as 2018 Chipotle’s brand was utterly tainted by an association with E. coli and other kitchen nightmares. The incident was the most widely publicized, but by no means the only outbreak of its kind and the results for Chipotle’s reputation were disastrous. A report at the time found that as many as 60% of the chain’s previously loyal customers “actively” avoided the chain upon hearing the news.

Much of the praise for the company’s astonishing comeback since then can be directed toward Brian Niccol, who was appointed CEO in 2018. Under Niccol’s leadership, Chipotle has managed to shed its pariah status and regain its place near the top of the fast-food pyramid. Niccol’s strategy placed heavy emphasis on three aspects of the business: marketing, digital sales, and the company’s 2,500 physical locations themselves.

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Chipotle’s marketing strategy has focused on building better customer trust, partly by highlighting the simplicity of the menu. Last year saw the launch of the company’s “For Real” ad campaign, which promised that Chipotle’s offerings were comprised of ingredients “everyone can both recognize and pronounce.” The related “Behind The Foil” commercials ramped up the transparency by offering into a typical Chipotle kitchen. These initiatives are hardly groundbreaking, but they mark a departure from an earlier attitude to marketing, which was so ineffective that Niccol himself dubbed the Chipotle brand “invisible” before he got his hands on it.

Another area where Niccol’s strategy can be seen to pay off is in Chipotle’s burgeoning digital business. Although the company has had a loyalty app since 2017, it was only last year that it eliminated its reliance on third-party delivery service DoorDash, allowing customers to order directly through the Chipotle app. On top of that, the architecture of the locations was updated to include pick-up areas as well as digital-only queues, maximizing convenience. The changes are proving remarkably effective. Digital orders jumped a full 88% year-on-year in Q3 and now account for more than 18% of total sales.

October’s earnings also provided another glimpse into what may be Niccol’s most ambitious project yet as Chief Executive. Back in February, the company announced that it would begin testing what it called “Chipotlanes” — drive-thru lanes tied to its digital platform. In the most recent report, Chipotle revealed that it plans to open more than 40 Chipotlane ready restaurants by 2020. Drive-thru lanes have proved invaluable to fast-food giants such as McDonald’s (NYSE: MCD), accounting for well over half of sales. As with the focus on marketing and the push towards all things digital, this will certainly be a development worth watching.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here

Jamie O'Donoghue
Jamie O'Donoghue
Content Specialist for MyWallSt

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