Chipotle Mexican Grill: Looking Past the Growth
Chipotle Mexican Grill (CMG) had a very positive second quarter. The fast food restaurant chain reported total revenue of $1.2 billion that is 14.1% better than that reported for the second quarter of 2014. This phenomenal growth in revenue has the opening of 48 new restaurants during the second quarter behind it. The total restaurant count for Chipotle now stands at 1,878. On not considering the new restaurants that were not present till the end of the second quarter of 2014, we get the “comparable restaurant” figures.
Growth across the board
There was an increase in menu prices too, which has impacted the food cost as a percentage of revenue favourably. Food cost improved by 150 basis points to come down to 33.1% of revenue. Similarly, restaurant level operating margin increased 70 basis points on a year over year basis. The margin was 28% for the most recent quarter. The primary reason behind this increase was a favourable sales leverage despite increased labour costs as a percentage of revenue. All in all, the company managed to decrease its overall cost including General and Administrative (G&A) expenses and improve the profit margins at every level.
The end result of all this was a net income of $140.2 million i.e. $4.45 per diluted share which means a 27% increase over last year’s net income of $110.3 million. The reported EPS also beat the analysts’ estimate of $4.43 per share.
Up to the end of June this year, Chipotle Mexican Grill had successfully opened a total of 97 new restaurants. For the full year, the company is positive of reaching or surpassing the top end of its full year target range that is 190 to 205. With that the fast food chain must easily achieve a similar double digit growth in sales for full 2015. But for the comparable restaurant sales, it has a low-to-mid single digit percentage growth range in mind.
Food and people culture to drive growth
Two things that Chipotle’s executives have stressed upon in the earnings call are their food culture and people culture. These cultures have definitely helped Chipotle to stand out in this overly crowded and ever growing industry. Towards an improvement in the quality of food, Chipotle has undergone a transition from Genetically Modified Organism (GMO) based food to non-GMO food. They have stopped using the artificial additives like flavourings, colourings and preservatives that commercially made fast foods generally contain.
Chipotle’s Food with Integrity program takes the environment, the farmers, the bakers and the customers' health and their taste into consideration to design the processes of preparing and serving food. Thus reiterating these facts will definitely communicate the value that Chipotle is creating for the customers and other stakeholders of the chain.
To highlight Chipotle’s points of differentiation, it has launched a Friends or Faux program. It is a digital game that invites customers to learn about the difference between Chipotle's ingredients and the ones generally used to make fast food.
Towards the people culture end, Chipotle management is highly focussed on the training and employee benefits. They encourage more and more promotions from the lower echelons of the hierarchy like field leaders to restaurateurs.
Further, meetings are conducted to perpetuate the restaurateur culture across the organisation. Therefore, Chipotle seems to have its basics right and it stands on extremely strong foundation of its culture and execution which is the reason behind its long continuing success over the years.
It’s not that there are only positives to take away from Chipotle’s results. There are some key areas where improvement is required. The company’s comparable restaurant sales growth was only 4.3% in the quarter, while it was 17% in the prior-year period and 10.4% in the preceding quarter. On the other hand Chipotle’s peers like KFC, Taco Bell and Domino’s have had higher comparable restaurant sales growth in the same period. Almost all the positive impact for Chipotle came from increased menu prices and mix of offerings. But the traffic to the restaurants decreased by 0.3% and that should be a cause of concern for Chipotle.
Chipotle must be satisfied with the results it got out of the second quarter beating some analysts’ estimates. It is doing well to differentiate itself by stressing upon and highlighting how its food is superior compared with other commercial fast foods. But it needs to resolve certain issues like a drop in traffic and pork supply pork shortage at many of its restaurants in order to become and remain the first choice of the potential customers.