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

Right. If you go to downtown, you're going to -- you'll get right to the front of the line.

Not sure it's worth it, but maybe. Okay. So another question here since we'll sort of stick to this idea of sort of the digital and top line. The question is about third-party aggregators versus your own app. I think, to some extent, that's the other benefit of shifting a little bit away from deliveries. I suspect you get more of the order-ahead and pickup orders through your own app. I don't even know if there's a possibility for the aggregators. So I guess, maybe if you can talk a little bit about that, and what it means in terms of the benefits of having orders that go through your own ordering platforms versus through an aggregator? So if you would even just talk a little bit about the mix, what it looks like you versus third-party? And then also how those differ in terms of the data you can capture and the margin if you're willing to go there, too?

Yes. Look, so when we do delivery through our app, obviously, we have more ownership of the data because we own all the data that goes through our app versus we have to partner on the data with the aggregators when a delivery occasion goes through the aggregator. The other thing that's really powerful within delivery in our app is, those folks -- I can't remember the percentage, but a very high, high percentage also are in our rewards program. And you can only get access to our rewards program and points when you go through our app. It's not available -- you don't get your points if you go through the aggregator either. So -- but from a pricing standpoint, we're kind of pretty neutral on the menu prices is what we've been testing. I think you've probably seen that if you've looked out there, but our menu prices are the same. Where you see the difference is the aggregators can control their service fees and the delivery fees that they want to charge. And then, obviously, when you go through our app, we control the delivery fee and service fee in partnership with DoorDash. They do our white label deliveries fulfillment. So we prefer to have more people go through the app because of the benefits around the data, and obviously, I think we just get more people then moving into our order-ahead business as well versus when somebody goes through an aggregator experience. It does appear those aggregator experiences are much more delivery-only occasions versus the movement between order-ahead and delivery.

So in terms of your -- in terms of a split, I mean, your delivery orders, let's say, are more of them coming through your own app at this point or through the aggregators? And I guess -- so that question remains.

Yes. I mean, more delivery goes through the aggregators than in our app, which makes sense. We've got DoorDash, Uber Eats, Postmates and Grubhub is where we're doing delivery with the aggregator versus we're just doing delivery in the Chipotle app on the other side. So there's more delivery business from the aggregators than in our app.

Go ahead.

Sure, just going to be going to say, well, when we emphasize a channel, customers respond, like, for example, Chipotlanes, not only is the digital much, much, much higher in Chipotlane. It's like 60% but the order-ahead and pickup is 40%. So it's 2/3 instead of in non-Chipotlane, it's about half. It's early days, but we have -- well, one digital kitchen that's been open for 3 days, it skews more white label already. Now it's early days, but I think it's just maybe an example, and this is one of the things we want to emphasize. If we can emphasize a channel and customers continue to respond, we can keep people in our ecosystem going through our Chipotlane or going through our white label. And I think the good sign on our first digital kitchen is, when people go to our white label, when it skews that way, that means they're thinking Chipotle first versus if you go to an aggregator, you can think of delivery first and then you're thinking, what do I want to get delivered. And we want people to think about Chipotle first and then think about what channel you want. You want delivery, you want order-ahead and pickup. So that's the condition, I think, we want our customers to go through. So it seems to be effective so far.

Okay. And that was really -- that's helpful in terms of where I think about going with this line of questioning, which is aggregators is more like customer acquisition. Do you find that you can shift people and -- to sort of different ordering modalities based on -- like maybe they find you through the aggregator and then they shift over at some point to perhaps your own app? And I guess, because I think when we think about what the value of being on an aggregator is, presumably, it is, it's a different customer base, and it's a -- and you can acquire anything and I was just curious if that's actually what's happening.

Yes. I mean, look, one of the best kind of things we do with the aggregators is when we provide incentives to those that have ordered delivery but have not done delivery from Chipotle in the aggregator space, right? Because, to your point, it's been just a huge reach tool for us to let people experience Chipotle off-premise. Then what we try to do is bring them into the Chipotle digital system, the carrot is the rewards program to then move a delivery occasion to, ultimately, a white label occasion, or when they discover that there's all this other access, whether it's a Chipotlane or a smart pickup time, to just order-ahead and grab and go, that's also a benefit that they discover because we do some targeted marketing, simple things, right, like bag stuffers and so on and so forth. So nothing all that advanced, but sometimes old school works.

Yes. And that's -- I think that's helpful for us. Those of us who have never kind of worked in a restaurant, it's helpful to sort of figure that that how it actually happens in fact. And I guess maybe we can answer -- one of the things we talked about a little bit is loyalty. Obviously, it's been a -- it's been very successful. I think you're well ahead in terms of your membership where other loyalty programs have been at this stage in their life cycles. I guess, maybe talk a little bit about what that means in terms of your ability to do targeted marketing. And how you think about using loyalty as an ongoing driver as opposed to just you get somebody who joins the reward system, you probably see a big list initially and then -- how do you keep sort of motivating them to come back?

Yes. So this is -- the team has done a really great job on this. We call these journeys. And the good news is, now we have over 17 million people. So we've done a lot of work to figure out what are the right cohorts. And then based on those cohorts, we put them on journeys and those journeys are all around influencing behavior based on whether you're new, light, medium, heavy user and what you choose to order from our menu and what occasion you choose to order from our menu. And so the communication then is targeted. If we find out you're a salad user and you've only done in-restaurant ordering, we'll put you on a different journey than somebody that's getting burritos with extra meat delivered. So it gives us the ability to find out like, "Okay, well, what occasions do they order what," which is also pretty interesting, whether they're individual ordering or whether they're group ordering. And we've learned a lot of information on there. So these cohorts are proving to be the right cohorts. And the journeys that we're putting people on are also proving to have an impact on behavior. And we see it be very effective with the light, medium and new user and also having some benefit with the heavy user. But obviously, you can get more frequency out of somebody that's got less frequency than somebody that's got a lot of frequency. And so we're really optimistic about $17 million becoming $20 million and so on and so forth. Chris has a great line. He likes to tell everybody the $17 million is bigger viewership than Monday Night football. So we have the ability to also talk about our brand, which I also think is really important, which people, once they understand the sustainability efforts that we have, our food with integrity efforts that we have, and, for instance, on the pandemic, all the safety protocols we're putting in place, how we were handling our employees, that was all hugely effective as well. So it's not just a deal mechanism, it's a branding mechanism as well, and it's also a way for us to provide the right engagement because we see who clicks on the sustainability measure message, who clicks on the safety message and how much engagement do you have. Do you click-through and watch the videos or do you just peruse the e-mail. So it gives us a lot of insight to make sure that we're bringing the right engagement as well as the right education on what to experience in our menu.

Right. Okay. That's very helpful answer and sort of that color about how you can target so precisely. I guess one of the things I -- you mentioned sort of sustainability. Maybe we can talk a little bit about what the supply chain looks like. In the past, I think, there have been, periodically, some occasions where you run out of a supply and pork was one of them because didn't meet your standards. I guess as you kind of think through the -- your supply chain, I know you have brought in the new head of the supply chain not that long go. Kind of what are the opportunities there? Whether it's sort of consistency or if there's sort of costs that you expect can come out? How much is still left to do on the supply chain?

Yes. Look, I think Carlos is the new leader of our supply chain efforts, and the team he's assembled is world-class. And as a result, he's got a great plan on chicken, he's got a great plan on avocados. He's got -- all the ingredients you want to make sure you got a great plan on for the growth that we've got coming, I think he's building the right plans. And the way he's doing that is we're doubling down with great suppliers, and we're also bringing in new suppliers. And I think people are very excited about being a supplier to Chipotle because of the growth that we have and then, also, the clarity of what we expect out of our supply chain. It's like, we're not compromising on food integrity. And we're willing to commit to deals that give you growth into a system that today is 2,700 restaurants, and the future is 5,000 or 6,000 restaurants with doing bigger unit volumes per restaurant. So a lot of suppliers take Carlos' phone call. And they're also very willing to figure out how to work best with Chipotle so that they're creating the right ingredients to result in the delicious food done the right way. So they've made great progress, I think, on our efficiency. They've made great progress ensuring up the plans to ensure we've got enough supply. And look, the way these guys have navigated the pandemic, I mean I would give them A plus marks because one moment, we thought we had way too much of something, the next moment you think you don't have enough, and in the next moment, you have way too much again and then not enough. So they've done a phenomenal job, frankly, over the last couple of months and from logistics to going all the way back to the field and done the right way, too, which is really important to me and our company. I mean, Jack, I don't know if you have anything to add to it?

I think you said it perfectly. They've had a great year. And more than that, they've got a great plan for the next several years so our unique supply chain will keep up with our growth.

Does that give you -- I have to ask about margins. Does that give you some sense about perhaps less volatility? Because I think it is the cost of goods line has swung by a couple of hundred basis points depending on the year, not any given year, but over time, it's been in perhaps a wider range than what I've seen in some other restaurant companies. So does this help with that over time, too?

Yes. I think it will, Sara. I mean, we do have a unique supply chain, and it's been a challenge really for a number of years, for a 1.5 decades to have supply keep up with demand. And so that does sometimes cause things like running out of pork or volatility. But a good example would be on avocados, which have been the most volatile of any of our ingredients and that's the one thing that can swing things 100 basis points 1 year and 100 basis points to the other side another year. And fortunately, the last 3 or 4 years have been more of a challenge just swinging one way. But the team is doing a great job in terms of looking at things like additional geographies, additional suppliers. And these things take time because it takes 5 years for a planted avocado tree to bear fruit for the first time. These things are affected by weather, but it's been very, very concentrated. So avocados have been concentrated so heavily in Mexico, pretty heavily into California. But we've added Peru, we're adding other geographies as well, too early to tell what those are. And then also work with technologies to expand the life of an avocado. Like an avocado doesn't fully ripen until you pick it, okay? Once you pick it, the clock is ticking, okay? But there are technologies, natural technologies that allow us to experiment with this, elongate this. So if you see that there might be a supply shortage, you could maybe harvest from one geography a little earlier, maybe stock up a little bit if we're successful. So these are just ideas of what we're doing to make sure that we have many, many more choices with avocados so that will be in supply. The prices, hopefully, will be stable, and there'll be delicious avocados. And it's early days, but I think there's going to be some good things coming forward in terms of cost, of course, but also keeping up with supply and making sure they're delicious.

I think we will be very happy to hear that. They love the guac. I want to stick to the margin topic, which is that I do think, more broadly, a lot of the conversation that comes up is, like, how do we think about bridging the gap between the AUV margin algorithm that Chipotle has laid out and maybe what we've seen so far. And I guess, maybe -- I know you get asked this all the time, but if you could just talk us through a little bit -- some of the specific factors at play? And how you're going to address them, how quickly? And with respect to technology, what are the opportunities there? It seems to me that better forecasting isn't just great supply chain and then also because the labor matrix, but anything you can sort of give us some insight on the margin structure.

Go ahead, Jack.

Yes, listen, I'll start. So first of all, when we look at our underlying margin, and when I say underlying margin, I mean takeaway timing differences, taking away shifts in marketing, higher state prices for a while, we're running carne asada. These are all things that have an impact, but it's not a permanent impact. When we look at what our underlying margin is, we're within striking distance of getting to the algorithm. And in fact, we gave some guidance for the fourth quarter that we expect our margins to be in the high teens, call it, 19%, between 19% and 20%. But if you adjust for things like carne asada and hard marketing, which we know we're going to spend marketing at about 3% for the year, but we're going to be much, much heavier in the fourth quarter. We're about a 21% in that ballpark. Our volumes are in the 2.2%, slightly north of 2.2%, depending on how you calculate that. So within striking distance, and we're still burdened with some of the COVID costs. Like people -- some are direct, like people calling out who are excluded because they may have been exposed, they may have a family member that has symptoms. And so we'll do the right thing. We'll exclude them, and we'll pay them, okay? We'll pay them over 14 day period. So we've got direct costs like that. We got indirect costs that, for example, more people are buying Burritos than bowls, and Burritos have a slightly higher cost. Now does that -- is that permanent? Because people get the Burritos and love it. Is it because so much is off-premise? And the -- I think a lot of people think that Burrito holds a little bit better than the bowls. So there's things like that, that are indirect, but there are shift that have caused some pressure. Steaks incidences way up. Now is that because we have a lot of new customers, and they went right to steak, which is premium price but also something that people will think is a premium protein as well. So there's things like that are putting temporary -- that might be temporary pressures. We're not going to be in a hurry to try to recover those, okay? When it looks like that's a shift that may shift back when people come back into the dining room. So I feel like we're within striking distance of getting there, and we do have other initiatives, Sara, to drive efficiencies, nothing that we want to talk about specifically, but we have things that we can do from a labor standpoint, from a food cost standpoint. So there are things we're constantly going to do to make sure that we continue to source really high-quality food, but look for costs in the system that aren't really adding value and see if we can minimize those. So I feel like we're within striking distance, and we've got some opportunities to close that gap. The only thing that is a -- there's a math challenge in there is that we do have some of our sales, like historically, our algorithm was food and beverage sales, for example, of $2.5 million should yield 25%. We are getting to a point where more and more of our revenue line includes just an offset to delivery fees. Like the fact that we increased menu prices to offset the delivery fee. It means that we might have food and beverage sales of $2.5 million, okay? But we might have sales of almost $2.6 million or $2.57 million, something like that. We're not necessarily going to get a full margin on just that menu price increase because that's more of an offset. But that's a slight mechanical issue that might be a 50 to 60 basis points. We're not going to be in hurry to try to close that gap as well, if that makes sense.

Yes. Okay. And that's, I think, more sort of an optical almost, as we think, .

It is and it's one of the reasons, Sara, like, we broke out on the white label, we broke out what those fees are because that's revenue, but that's not margin revenue. That's just something that helps offset our expenses. The other piece that's menu prices, we're not going to be able to break that out, but we could be more transparent. You know what the price increase has been. It's in that kind of 13% range or so. And we'll just provide transparency as we talk about the algorithm and what's holding us back from getting all the way there. And the menu price increase is just one of the mechanics.

Okay. Right. And I think -- so we only have about 4 or 5 minutes left. So I do want to talk about unit growth and the outlook there. This idea of $2.5 million or more earning fees, 5,000, 6,000 restaurants in the U.S. If you can just talk about your process. How you identify that or what gives you confidence because that's a really big system? And then also, the thing that we don't talk about too much because there is so much opportunity domestically, is international outlook? And whether or not you've been able or willing to put some numbers around that?

Yes. So look, the -- I think Jack has talked about this a few times, how we get to the 5,000 or 6,000 is just looking at our penetration rates around the country. And if you look at some of the places where we have our most penetration, and you just simply apply that to the rest of the country, you quickly get to the 5,000 plus number. And then when you start thinking about, "Okay, well, we could probably still grow the penetration in those markets," you quickly start to think about how you get to the 6,000 number. So it's pretty straightforward on how we're getting to that number in the U.S. The thing that's consistent is, as we continue to open restaurants, the returns are great. So the openings are terrific. The sites are available. The real estate folks love having us, or the landlords, I should say. So there's plenty of supply of sites. The economics are terrific. We've got the capital to do it, and we also have the people capability to do it. So we're going to continue to keep accelerating new units in the U.S. So that's going to be a terrific growth stream for us for awhile in the United States. International, we've made great progress in Canada. So we're feeling really good about continuing to build out in Canada. We were really optimistic about getting some things rolling in Europe this year to just kind of test and learn our way through it. Unfortunately, the pandemic and closures kind of has slowed that down. But when I talk to our European team, Jim Slater is the Managing Director over there, there's a lot of things going our way, Food with Integrity, customization, the digital aspect that we have and the strength of the U.S. brand are all things that I think are going to play well in Europe. And if I kind of go to the basics of Chipotle, it's like, all right, we've got quality, we've got value, we've got customization, we have speed, and the food is delicious, boy, that all seems like the right tools to make something work beyond the U.S. and Canada. So we're going to take a smart approach to it. We're going to use their stage gate process. The good news is now we have a digital system. We have flexibility in assets. And we're going to use all those things to figure out how we expand beyond U.S. and Canada. But we're still in the early stages of it, and unfortunately, the pandemic maybe just pushed us back a year or 2 on getting some of our learnings out of those markets that we hope to get this year.

Right. But underlying opportunities are certainly there, sounds like?

Yes, yes, yes.

So I think that's a good place to leave it. And I want to thank you all for joining us. It looks like your weather is a lot nicer than mine. But nevertheless, we stayed inside -- with us for the past 50 minutes. So we do appreciate your time and your insights.

Yes. Thanks, Sara. Thanks for having us.

Thanks, Sara.