Chipotle Mexican Grill, Inc. (CMG) Earnings Call Transcript & Summary

All right. Great. Thank you all for joining us. We're so happy to have Chipotle with us on this virtual community today. With us, we have Brian Niccol, Chairman and CEO; Jack Hartung, CFO; and Ashish Kohli, who's the Global Head of Investor Relations. Brian, I think you wanted to make a few comments before we jumped into the fireside chat.

Yes, sure. Thanks for having me with you guys and obviously delighted to answer any questions and look forward to having the dialogue here. Obviously, Chipotle, we believe we're focused on the right strategies. I think I've outlined those before, so I won't repeat them. And I'm very proud of our organization, the way that they've handled COVID and frankly, some of the most recent challenges that we've all experienced. And as a result, I think our organization is stronger. Our culture is stronger, and I think we've got the right leaders in the right roles doing the right things. And I think an organization is only as good as its people and its culture, and I'm really proud of how both of those things have stood up through really the last couple of months. So happy to talk about the business. I'm sure that'll be part of the fireside chat, but I just want to make sure you guys knew how proud of this organization I am and humbled I am to be leading this organization through which has been a difficult last couple of months. So you find out a lot about your leaders in these challenging times, and I'm hugely impressed and honored to be a part of the team.

Thanks for that. I think it's been a little over 2.5 years since you joined Chipotle or roughly around that time frame. Can you talk about what's been most surprising at Chipotle for you and maybe what's been most challenging? And Jack, obviously, you have been at Chipotle a bit longer. What do you feel is the same or different about Chipotle today versus prior years?

So I'll go first, Jack, and then I'll hand it over to you. And what I would tell you is one of the big surprises for me was really understanding just how powerful the actual throughput model of Chipotle is. So I knew the food was great. I knew the culinary was great. I knew there was a special approach to food. But what I probably didn't appreciate before I got into the business was just how powerful throughput is. And we really have been focusing on that from an operational excellence standpoint, and what that presented for us was some challenges on things that I thought would be easy to do from a menu innovation standpoint that made me think twice about doing it because what we realized is as a team, you know what, the best thing we can do is have great culinary of the food that we can make really fast and then continue to present this unbelievable value proposition for people. And then -- so as we put together the stage-gate process, one of the key pieces of the puzzle in that was what's the impact on throughput. And that's why we've done things like carne asada, why we've done things like Queso Blanco, frankly, things that have been able to support the business from an innovation standpoint, but it also helped the team, frankly, execute from a throughput standpoint. And something that's been a lot harder to do or something that I thought was going to work for sure was like an avocado tostada. But when you actually did the stage-gate process, conceptually, it's scored off the charts. If I were talking to anybody like, "Hey, shouldn't you do avocado tostada?" and we're like, "Yes, it seems like an easy one," it ended up being a mess on the line. So as a result, we didn't move forward with it. And we learned that early in the stage-gate process as opposed to let's just go ahead and launch it and then learn it on a national stage. So the good news is we have a lot of flexibility in ingredients. We just have to make sure that when we put those ingredients on the line, it stands up to our mission of Food with Integrity and then also its ability to be executed within our throughput model. Now the one thing that's been a delight or a surprise is -- and this is probably part of COVID -- is the fact that our digital business has gotten such scale so fast because as that allows us to do some additional innovation on our digital make line that we can't do on the front line. So we're going to be able to do innovation on that digital make line because the ordering experience is different. You order ahead, which you want us to order -- or would want us to make. So it's all planned. It's a smart pickup time. The team member knows what to make for you, and then you come pick it up at 1:15 p.m. when you pick your time. So what's going to be great is we're going to able to do innovation that can be in our digital business, and in some cases, it might pull all the way across our in-store business. And then in other cases, we're going to be able to do things in the in-restaurant that we may choose not to pull across our digital business. And I'm really excited about this because now it gives us another level of innovation that we didn't have just 2 or 3 months ago. The other thing I'll tell you, too, is hugely impressed with the progress that we've made on our operations. Scott and the team have done a terrific job, but I think this just speaks to the fact that we own all the restaurants. So when we have these all manager meetings or field leader meetings, these are all our employees. And when we sat down the focus areas and the priorities, the ability to move on that has gone a lot faster than I would have thought. I was expecting the adoption to take a little bit longer, and it actually -- the guys have done a fabulous job, frankly, of taking and cascading and getting the execution all the way down into the restaurant. So that's been a pleasant surprise or a nice power of owning all our restaurants and along those lines, our ability to implement all the digital systems and really, call it, 18 months, I got here 2.5 years ago, but it took us a couple of months to figure out exactly what we wanted to do. But the fact that we've been able to implement all that really was -- speaks to, one, the culture, the people that we put in place but also speaks to, I think, the fact that, again, it's company owned. So when we decide to allocate capital and we decided to put the organization against it, it gets implemented and it gets done. So that's been a nice power. And then obviously, the strength of our balance sheet has been a blessing as well. So it's been really -- it's been a great couple of years.

Jack, anything to add?

Jack?

Yes. Well, yes. So you asked, Sharon, what's been the same and what has changed. I'd tell you the thing that has stayed the same which -- and this is going all the way back to when Chipotle was a relatively small private company, is around the purpose and around the food. Chipotle has always had a purpose. The words described in the purpose has changed over time, but it's always been about food. Where does our food come from? What's the impact on the environment? Is it wholesome nutritious food? And is it real cooking? What's different now, though, is we've now got a team of professionals from -- and I would say from the senior team all the way down to our restaurant managers where we've pulled talent from the industry. So these are folks that have been very successful [indiscernible] or people standpoint development, operations with Scott that Brian just mentioned. So it's this team of people, and then they've hired a team under them, very experienced people that have all rallied around the purpose. This hasn't been a team of people that have come in and said, "Hey, Chipotle doesn't do it right. Let's do it the way I did it at my last place." It's more embracing of the purpose and embracing this focus on food, wholesome, sustainably raised and then real cooking with our food and then bring better marketing, bring better digital, bring a better people approach to it. So that's what's been different. It's been refreshing. And I think the power of this brand which has always been a special brand, now with this kind of talent base rallied around the purpose, makes me very confident about where we go from here.

Obviously, we're in kind of unprecedented times. And the last time we all spoke was on your earnings call, and I don't think at that point, you had reopened any dining rooms. I don't know where you stand today on the reopening of dining rooms but if you could give us some sort of update there what happens with comps when you reopen, what happens with delivery when you reopen and how you've really prepped from that reopening of the kind of [ in-seating ] again.

Yes, sure. So not surprising, we've kind of taken our stage-gate approach to reopening dining rooms. So we started with just one restaurant north of Dallas and one restaurant north of Atlanta, and we put in place all the signage, all the positions, all the moving of Tabasco bottles and everything to the back of the restaurant behind the cash register. But at a high level, think of it this way. We've positioned a person who's in the dining room, we call a steward. Their job is to make sure that all high-traffic areas are sanitized, cleaned accordingly. If anybody sits down, we clean right after they get up. We're cleaning the doors as you come in, you come out. So it's just a heightened level of, I would call it, sanitizing and cleanliness. And then also just making sure like if somebody leaves a Tabasco bottle on the table, that Tabasco bottle gets picked up, taken behind the cash area. It gets sanitized, so that's ready to go in the event someone else asks for it. Along those lines, we've put signage up in the restaurants. We've always had our hand sanitizer right there for guests when you come in. But we've now put up signs to say these seats are closed, tell people like, look, if you want forks and Tabasco and all this stuff, make sure you're asking for it at cash because it's not going to be sitting out in the dining room. And then as far as our team members go, all of our team members are wearing masks. We are not mandating customers to wear masks, but we are encouraging customers to follow whatever the municipality has encouraged people to do. We post that signage that's consistent with it, but we've not asked our team members to be the ones policing whether or not customers are following those protocols. And then we've also put into place social distancing messaging as well. So when you come in and get in line, there's big red circles that say stand here for social distancing. And the good news is it worked really well in the first couple restaurants. Actually, it was interesting. I was in this restaurant in Georgia. And I went into the dining room, and there were 2 gentlemen actually sitting down the eating. And I asked one of the guys like -- so what do you think? What's your expectation? And literally, he was like, "No, thank heavens you finally opened the dining room. I got so tired of eating in my car." And so the point in me sharing that story is people want to have that dining occasion. I don't know if they necessarily want to have a dining occasion where they're going to sit there for 2 hours and the whole process, but our dining occasion, where it is, you come in, get your food. You sit down. You can be out of there in 15, 20 minutes. People appreciate having the dining room back. And kind of what we've seen since then is, one, the signage, all the protocols for employees definitely appear to be working. People are practicing the right procedures. And we're seeing our dining room business in those places where we've opened starting to recover. I think we've said we saw 30%, 40% recovery in some places that have been open longer than others. Your question on how has that impacted digital, the good news is our digital business, as we anticipated, is proving to be pretty sticky. So we've hung on to 70%, 80% of the digital business while we're seeing these dining rooms start to recover. And I think there's a lot of reasons for it, but at the simplest, they're just -- they serve different occasions. And we've brought in a lot of new users to the business through an acquisition tool of free delivery that, in turn, resulted in them downloading the app and/or joining our rewards program. So we've got more insight. We've got more occasions, and now we actually have more access points available again. That is kind of what's happening.

And so what -- how many units do you have seating areas open at this point?

Where are we now, Jack? I think it's definitely a couple of hundred now, which...

Yes. We're approaching like 30%.

Around 30%?

Yes. We're approaching 30% because the -- what happened was it was a slow go at first, and then it was going better. I mean it's going better. So every week, we have a few hundred more stores that come onboard.

So in terms of your line of sight for a full system-wide reopening, do you have any estimates on when that might be?

I mean I think the wildcard in this is probably more than Northeast than anything as well as, hopefully, I'm optimistic that we're not going to have people go backwards either that opened. But right now, I think I just saw when New York just opened yesterday if I remember correctly. So we're going to start seeing all these markets start to reopen. We don't -- just so you know, like, just because New York, they're open yesterday, we don't like do it that day. We kind of walk with our employees into how we reopen those dining rooms. So it usually takes us a week or 2 before we do that. But look, if everything keeps going, our hope is definitely by third quarter, fourth quarter, we'll have all these dining rooms up and running again. Probably still have to practice some form of social distancing will be my guess unless something happens that we haven't heard about yet. But I'm optimistic that if there's no setbacks, hopefully, that fourth quarter, parts of third quarter will be all dining rooms open.

Jack, we get asked all the time about the different margin structures and your different channels, and obviously, there was a pretty dramatic channel shift in the past quarter in March and into April. Can you kind of walk through again the puts and takes in the margins between digital order ahead, delivery and dine in?

Yes. First of all, let me kind of rank them, Sharon. So our highest margin transaction is when somebody orders ahead either through the app or through the website and they pick it up. They either come to the restaurant and pick it up off of one of the digital shelves or they come to a Chipotle. That's the highest margin transaction. Second highest is coming to the restaurant and order along the line and either dine in or take your food out. And then the delivery channels, depending who the aggregator is or depending on whether it's on our site, the white label, those are going to be the lowest transaction. That's because of the delivery fees. So the thing about the delivery fees here, there's a couple of nuances here. Delivery is obviously much higher than it was pre-COVID. So when we just get back to our volumes the way they were before, if there's a higher percentage of delivery, there's going to be an additional fee there. So that's going to have an obvious hit to the margins. We've already been talking about -- we're starting to experiment, though. We're within striking distance, Sharon, of equalizing that extra fee even if we keep the same volume, and there's just a mix shift from one of the other channels and into delivery and between menu prices or the delivery fee, which we've been through a lot of free delivery to acquire customers by charging a fair fee and then service fees, which every other restaurant company is doing all 3 of -- or almost all of them are doing all 3 of those and in a big way. You've probably studied this. If you look at some of the menu prices that others are charging, it's pretty extraordinary for a delivery experience. And our menu prices have been exactly the same. So we've been experimenting with that, and we think we can pull the levers so we can equalize that. Now what we hope happen is that the fastest growing part of -- as we accelerate through COVID -- or the fast-growing channel is the order ahead and pickup. So delivery really shot out of the gates fast with COVID. But as things kind of moved on, people were gravitating a little bit more towards the order ahead and pickup. It's the ultimate touchless experience. You have complete control over the experience, and it's the greatest value as well. And from our standpoint, it's the highest margin as well. So it's kind of the natural where everybody wins. It's one reason why you've heard us talk about Chipotlane a lot. The Chipotlane is a better convenient experience for our customers, has better margin for us as well. And if you're looking for contactless, again, it's the most contactless experience you can get.

So when you think about or you study price elasticity of demand for the delivery business, I mean, how regional is that? And how micro can you get on that?

That's -- frankly, that's what we're experimenting right now depending on which levers you pull. And the thing we're finding is that customers seem to be a little -- they seem to be more sensitive to the delivery fee, like you might see a difference if you charge $2 versus $3. But you could charge a higher menu price increase that's more expensive than the delivery fee, and they don't notice that so much. And that -- so that's what we're experimenting with right now, Sharon.

So it kind of fits into rewards. I've actually been really surprised how many new to Chipotle -- first of all, I can't believe there's anyone that's still new to Chipotle. But then when you talk about the number of people that have signed up recently that are new to Chipotle, I mean, has that really surprised you internally on how successful [ you're being able to attract customers? That's something somebody who ] [indiscernible].

I'll start. Brian's got his hands full. Yes, Sharon, the answer is yes that we thought when we launched loyalty that it was going to be our most loyal customers, and they would be a no-brainer to earn the awards, which is going to be great. But what was a really nice surprise was a significant number somewhere in the 30% range and higher of our loyalty members, from the early days until today, are new to Chipotle or haven't been into Chipotle in at least a year from what we can tell. That's been fantastic. That is dry powder to go ahead and market to those folks who haven't been a loyal customer. We can incent them to come at different times. We can incent them to use different channels, and so that's been fantastic. And I would say the COVID thing has not only accelerated people trying digital. So a lot of people, even if they're customers of Chipotle, have tried digital for the first time. But once you try digital, you're into our loyalty system as well. So that probably pulled demand 2 or 3 years in terms of people trying to go. We used to have about 75% of our customers, Sharon, that would come into the restaurants and never use digital, okay? And now most of those people during COVID, they still want to visit Chipotle. They have tried digital now. Now that they've tried it, we're seeing that it is sticky.

And then on the ability to leverage the data you're getting from loyalty, where are you in that process? And how successful are you in kind of influencing behavior or increasing frequency?

Yes. I'd -- what I would tell you is one of the things that's great is we've gotten such an increase in the data, right? So we've gone from 8 million customers to now 12 million, 13 million. Eventually, we'll get to 20 million here in not too far off. And the thing that's great is because we've gotten such bigger scale, we've now gone from what I would call just experimenting with cohorts to actually taking those experiments and putting them into action where we now call -- we have ongoing customer journeys where we're seeing light, medium, heavy users in each of these different cohorts having effectiveness on driving their behaviors, more specifically their frequency. And those ongoing journeys, obviously, the more people we have in each cohort, the more effective it is on the total business as far as sales go. But the other thing that's also really interesting is we gain more and more insight into the nuances within that cohort so that we can layer on supplemental journeys, which may speak to you, Sharon, versus Jack. Even though you're in the same cohort and you're getting kind of the same base plan, we're now getting to a level where we got enough people where we can also add on the supplemental journeys that get even more targeted to you versus somebody else in the cohort. So the scale of it and then the, I call it, the learning and experimentation that we've had to date has afforded us the ability now to take advantage of the bigger scale and then put the communication into these ongoing journeys as well as these supplemental journeys.

Is there a particular frequency band where you find it easier, if you will, to incentivize that customer to come back more often? So is the lowest band, if you will, where you see the biggest lift? Or is it the medium band or the new to Chipotle?

It's more -- it definitely skews more towards that medium customer. And part of it is what you're doing here is you are taking it with a late customer because, look, if you're just going -- say, they only went one time a year and we get a second one out of them, that's a huge increase. But where we're seeing the most impact is that medium customer where they're doing it 3 or 4 times, where now all of a sudden, we get them doing it 2 more times, but you just feel it more in the business. And then that heaviest user, they're already coming pretty frequently. So when you just add 1, it's hard to add 4 more with a customer like that. So -- but the medium user's already got a little bit more of a routine built in versus that light user. It takes us a little bit longer to build more of a routine that can go beyond just increasing it once or twice.

That's helpful. 2020 has obviously been a strange and challenging time, but I'm sure you've learned a lot about the people that work at Chipotle and maybe even what the restaurant of the future should really evolve to look like. So if you could help us understand what you really learned or what the big takeaways are, I'm getting some questions, too, online about whether breakfast is still out there as a potential avenue of opportunity. So maybe take us through your thought process, what's happened over the past few months and how you think about the future now.

Yes, sure. Look, I think probably the biggest thing we've learned, which is we knew digital was a big opportunity for us. But the fact that it jumped almost 3x in size to go from 20% of our business to now 70% of our business and it's staying sticky, we're going to be more and more a digital company. And because this trickles down to data we were just discussing, it also talks about all the different access points that we've innovated against, whether it's Chipotlane, the mobile pickup shelves and delivery. Just if you think about that, those were all access points that didn't exist 2.5 years ago. And in some cases, Chipotlane didn't exist a year ago. And now what we've definitely seen is there is plenty of scale on this digital business where we've got more flexibility in our assets to figure out what we want to build, where and when. And the reason why that's really important is that means we've got the ability to penetrate places where we're really lightly penetrated because we can put in the full Chipotle model, meaning you've got the dining room. You've got the order in store. You've got the pickup shelves. You've got the Chipotlane. You've got delivery. Or maybe it's a market where we're like, you know what, we're really penetrated. The thing to add here is just Chipotlanes because people just want the additional convenience access point, so all you have to do is build Chipotlanes into that market. And then it's also got implications for how we think about going outside the United States because now I've got a digital system that I could arguably lead with and then pivot from that digital system into the physical assets that we want to have. And we're just going to be stepping harder and harder into this digital proposition to complement the culinary in-store experience. And it just gives me more and more confidence that $2.5 million and 25% margins will be a great milestone for us to get back to, but it's going to be just that, a milestone. It's not going to be an end point by any means. But I've definitely learned quite a bit on how customers want to access Chipotle via a digital experience and then the type of access that they want. That's been pretty powerful for sure. And then the other thing, too, I think that we've learned throughout all this is in Chipotle, one of the things that really surprised me was how quickly people adopted Chipotle for that family group occasion. We probably thought of more as like an individual meal at lunch. People kind of just did it when they wanted it as opposed to this is the meal to solve for the family. And one of the things that's interesting, we did some research and they were like, you know what's so great about Chipotle is everybody gets exactly what they want. It makes dinner a heck of a lot easier because we don't have to find a compromise on anything. So we've learned that we can play in meaningful occasions that are new occasions, and then I think the digital business is going to prove to be just a huge accelerator for the business, both now and in the future. And I've seen it in the United States and outside the United States.

Any change in the [ long term ] around 4,000 stores in the U.S., 4,500, I think, Jack, that's been out there for quite a while? I mean as you think about digital and the way that this could influence the overall long-term targets, any thoughts there?

Well, Jack, chime in here, but I definitely think 5,000 restaurants or more. When you just look at restaurants on a per pop basis, it's like 1 restaurant every 50,000 people. I think we've got opportunity to, for sure, to maybe even go beyond that as you look forward. So -- especially because we've got this new flexibility in what we can build where. But look, the goal will always be, Sharon, how do we maximize Chipotle sales in every trade area. And what that format looks like, the good news is we've got more flexibility. So Jack, I don't know, anything you want to add to that?

No. 100%, in the 4,000, 4,500, Sharon, that's an older number. So we're formally in the 5,000, 5,500 and above, but that's calculated based on markets that are the most dense, and we're still growing in those markets. So the number has an upward bias to it.

Actually, thanks for reminding me how long I've been following the company. So...

I know. Well, it was at 3,000 one time, so -- but that was a long time ago.

But I think that's great. I think we're out of time. Are there any last closing comments that maybe you would like to make?

Look, the one I would make is I think what COVID has done for us is it's really accelerated our digital business, but it's also validated, I think, the strategies that we've put in place 2.5 years ago on really focusing on making the brand more visible, what it stands for. I think that is, at its core, Food with Integrity, great culinary is a point of difference for us, and we're going to stay true to that. And then this digital system is truly an accelerator. Running great restaurants with great ops, great hospitality, the right people, that's working really well. The stage-gate innovation approach is working really well. And then I think we've got the right organization with the right leaders, and we're building the right culture. And we're always going to keep working on that. But so proud of where we are and very optimistic about where we're going. So thanks for having us.

Yes. Great. Thank you for joining us.

Thank you, Sharon.

Thanks, Sharon.

Bye.

Bye-bye.