Is Focus On Its Core Brand Critical For Chipotle’s Revival?

Chipotle Mexican Grill‘s (NYSE: CMG) Q3 2016 results (reported October 25th) were not very encouraging. The company reported a drop in both revenue and earningsand  missed the consensus estimates for both these metrics as well as  comparable store sales. While Chipotle has taken several initiatives towards improving food safety and is aggressively promoting its revamped self, the company has not been able to attract enough consumers back to its restaurants. It is now looking at menu innovation and digital ordering as the two key drivers to entice customers. Chipotle is also cautious that its new strategic initiatives do not lead to any distraction to the core Chipotle business. The decision on no further investment in the Shophouse brand and looking for strategic alternatives for this brand is in line with this approach. However, the company is looking at diversification into pizzas and burgers as growth strategies with small investment and limited distraction to Chipotle’s core business. We believe that as, Chipotle struggles to attract customers, it must focus on its core brand, pursue menu innovations and provisw better guest service to achieve its recovery.  A strategy of limited diversification should work in its favour, as well.

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Focus On Menu Innovation And Better Service

As Chipotle works on its recovery program and focuses on food safety initiatives, the company realizes that safe food alone is not enough to attract consumers to its restaurants. The company needs to deliver great tasting food, along with superior service in its restaurants, to drive sales. Several innovative measures, such as exciting menu items and fast and convenient service, are essential to meet this requirement. The company is working on these initiatives wth care,.  In fact, the nationwide launch of its new menu item “Chorizos” earlier this month has been very successful. This new menu item now accounts for 7% of the entrée sales country-wide. The company is also testing two different desserts and will select one of them to be offered to consumers in the near future. Chipotle sees an opportunity to entice customers through thoughtful menu development and is working on these initiatives. On the service front, the company is working to make its digital ordering more appealing to customers and more efficient for its restaurants.  The company is optimizing the use and design of its second make lines (where digital orders are fulfilled) and expects this initiative to increase digital ordering as a percentage of its sales to a much higher number compared to the current 6%.  As the company works on these measures and looks at other initiatives beyond food safety and promotions to attract consumers, the complete focus of management is essential to achieve this goal.  While diversification into other cuisines can become a growth seed, it can also prove to be a distraction for the management and impact the measures to bring the core Chipotle brand back on the growth path. We believe the decision not to invest further in Shophouse will ensure that the focus remains on the core brand and alternatives such as “Tasty Burgers” which do not cause much distraction to the management can drive growth in future.

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