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If I Were a Chipotle Investor, I’d Hate This

Let's set the record straight: I eat at Chipotle (NYSE: CMG  ) every day. I love the fast-casual Mexican chain's fresh, healthful, sustainable, guacamole-licious burrito bowls.

I'm no Chipotle investor, though. I've noticed a problem in Chipotle's operations that doesn't bother me as a customer, but would give me major heartburn if I were an investor.

Guacamole costs extra. Is that OK?
That's the question I get asked every time I pass through Chipotle's fast-service burrito assembly line. I always answer yes, because I can't pass up Chipotle's guac.

There's a reason Chipotle charges $1.80 for guacamole, which ups one burrito's price by a whopping 30%—it's because guac is irresistible for customers and investors.

Customers love guacamole because it's delicious; investors love its high profit margins.

But what if customers are eating Chipotle's guacamole while keeping investors from profits?

93% of lunches are not free
Here's what I've noticed as a daily Chipotle customer: the cashiers, whether new or experienced hires, often forget to charge me for guacamole. I always correct the cashiers, but that hinges on my honesty and my knowledge of Chipotle's menu prices.

How many Chipotle customers will even notice when they're not charged for guacamole? If they do notice, are 100% of those customers honest enough to correct the cashier?

Based on my experience, I'm not charged for guac at Chipotle every 1.5 to 2 weeks. That's once every 10 to 14 days, or 7%-10% of transactions where I have to correct the cashier.

Of course I'm only a sample size of one. At the very least, though, my experience shows that Chipotle does undercharge customers. Whether it's 1% or 12% of the time, it does happen.

Economists love to say there's no such thing as a free lunch—how about at Chipotle?

Henry Ford would shake his head
The reason for Chipotle's under-charging errors, in my opinion, is related to the restaurant's assembly line service. Thanks to the miracle of economic specialization, Chipotle customers can hardly blink as several workers scurry to assemble their burrito.

Problems occur because the workers who assemble customers' burritos are not the cashier. They must relay the orders vocally to the cashier, who then rings up customers. It's easy to see how during a lunch or dinner rush, order details would be lost in translation.

Chipotle's cashiers are only human and shouldn't be blamed for guacamole pricing faux pas, but management should be. As an investor, I'd want this loophole closed ASAP. I'd want to know how often customers are undercharged, and what Chipotle's doing to fix it.

Foolish bottom line
With Chipotle's premium stock price (now trading at 157 times 2012 revenues), investors should expect the company to be operating at maximum efficiency. Chipotle may not be doing so, and may be leaving easy money on the table by undercharging its customers.

But is Chipotle still a great growth stock?
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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2014, at 8:57 PM, ChipotleConsumer wrote:

    They also like to give double meat for free. It happens a few times a month for me.

  • Report this Comment On March 10, 2014, at 1:32 PM, terrynad wrote:

    They never forget to charge me. The person preparing the burrito always marks the paper foil with a "G".

  • Report this Comment On March 10, 2014, at 2:48 PM, thequast wrote:

    Why are we talking about 2012's revenue?

  • Report this Comment On March 10, 2014, at 3:22 PM, sam54125 wrote:

    My husband worked there for a short time. He made the G and now he makes it for us at home. Lucky me.

  • Report this Comment On March 11, 2014, at 9:15 AM, raggedyann wrote:

    simple solution: round green & brown stickers such as you would see at a garage sale. green for guac, brown for extra meat. stick one on the bowl or foil wrapping. cashier is alerted.

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Glenn Singewald

Glenn Singewald studies Economics and Food Studies at UNC-Chapel Hill. Covers consumer goods and China's economic rise. Enjoys rare steaks, fine wines, and winning investments.

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9/4/2015 4:00 PM
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