Yahoo Finance Why There Is No Magic Bullet for Chipotle
Chipotle (NYSE: CMG) has been on a tear in 2018, surging over 40% since the start of the year. Of course, the stock had already been down so much, so when new CEO Brian Niccol replaced founder Steve Ells in February, the market took a fresh look at the company, sending the stock up from around $300 per share to over $450 today.
Except for one thing: Nothing's really changed in Chipotle's operating results. At least, not yet. Acknowledging this, Niccol recently unveiled a new plan to get Chipotle back on track.
The effect? An 8% drop in the stock the next day.
Though shares have managed to recover, I think the market may be catching on to the fact that the new plan is really more of the same stuff Ells was trying, just implemented by a new person at the top.
Image source: Chipotle.
Calling Don Draper
At Taco Bell, Niccol was known for his savvy and playful marketing, and investors hope he can leverage these skills to improve Chipotle's marketing efficacy. Chief Marketing Officer Chris Brandt, who joined in March, outlined management's "new" strategy:
Our ultimate marketing mission is to make Chipotle not just a food brand, but a purpose-driven lifestyle brand. ... We need to show people we can have some fun, because when a brand has a purpose, is visible and is doing fun things that are a part of culture, people are more interested in it and want to be a part of it.
I hate to break it to Niccol and Brandt, but Chipotle had already been striving to be a lifestyle brand that engaged in fun, innovative marketing for many years. The company won Best TV ad award at Cannes in 2012 for its Willie Nelson-sung animated piece "Back to the Start" that aired during the Super Bowl that year. The company had also sponsored for years a series of music festivals/farmers markets (dubbed Cultivate), and last year, Chipotle rolled out a series of ads, called "As Real as It Gets," with a psychiatrist voiced by Jeffrey Tambor talking to famous comedians in a giant Chipotle burrito.
Brandt also said that the company was running spots on the "NBA playoffs, and season finales of top shows across a variety of networks." In other words, expensive spots.
Chipotle's business model had been so good prior to 2015, because customers flocked to the brand without excessive marketing. Now, it looks as though Niccol and company will be spending more on tactics prior management already attempted.
Bringing chorizo back?!
Another pillar of Niccol's plan revolves around menu innovation. Again, this is something that Steve Ells already tried in 2016 and 2017. Niccol says, "There was no validated menu innovation pipeline, a general lack of customer understanding, and no real process for scaling and commercializing innovation."
I think that gives Steve Ells short shrift. Chipotle had already unveiled several new menu items since late 2015, including both chorizo and queso sauce. Ells also established the NEXT kitchen in New York City in 2017, where the company develops new ideas such as bunuelos desserts and new margaritas.
What happened? Queso was widely panned (at least on the internet), and chorizo was eventually pulled from restaurants.
Interestingly, one of Niccol's new ideas is ... to bring chorizo back.
It's true. Apparently, some customers have voiced a longing for chorizo, and Niccol is listening. But again, wasn't there a reason prior management pulled it in the first place?
Niccol has other ideas of course, but new menu items have the potential to both increase cost of goods sold and add complication to Chipotle's operations, which is why the company had such a limited menu for so long. While these new items may drive some incremental revenue, they will also come with increased costs and offsets.
Going digital ... again
A final pillar of Niccol's plan is to increase digital initiatives. Niccol touted a new partnership with food-delivery service DoorDash to supplement the existing partnership with Postmates, as well as plans to add delivery ordering options to a revamped Chipotle app. Niccol also plans on moving Chipotle's headquarters to Newport Beach, California, from Denver in order to "fill the skills gap" he sees at the company.
Again, I'm not sure what the thinking is here. Ex-Starbucks CTO Curt Garner already came to Chipotle over two years ago, and the company has already had mobile ordering on its app for some time. In addition, while California may have a better tech workforce than Denver, costs of living are also way higher.
Shareholder deja vu
Investors have backed Niccol ever since this past winter, but while it's possible he can execute on this strategy better than his predecessor, he isn't Superman. If these initiatives don't materially improve results soon, Chipotle's stock could swoon again. I'd be cautious.
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Billy Duberstein owns shares of Starbucks. His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy.
