Chipotle Could Cut Costs by Rewarding Its Customers With Burritos

A food technology conference turned up a problem for Chipotle, along with a possible solution.

Jul 12, 2014 at 10:00AM

Cmg

The rise of Chipotle (NYSE:CMG) has been driven by the vision of its management, which includes environmental sustainability. So Chipotle issued a challenge to technology industry teams at the Food + Tech Connect event Hack // Dining NYC.

The challenge description included a wide variety of areas in which restaurants could improve that included more use of natural light, the reduction of food packaging, and operational throughput. Throughput has been an issue for Chipotle's competitor Panera Bread (NASDAQ:PNRA), which is why Panera has rolled out upgraded and customized ordering through a mobile app with its Panera 2.0 initiative.

Big burritos
One team, Just Right, discovered that most of Chipotle's customers don't eat their entire burritos. This makes sense, because these burritos are very large and that's been one of the chain's selling points in the past. Specifically, the team learned that 57% of the customers in their survey didn't finish their burritos. While Chipotle could just shrink the size of its burritos in response to this, it needs a way to ensure that customers still feel like they're getting a good deal.

Just Right came up with a suggestion for an app that would reward Chipotle customers for ordering burritos that contained fewer ingredients. A customer who cut back would receive loyalty points, which the team called peppers. In the proposal, the team suggested rewarding a customer with a free burrito for 50 peppers. Chipotle liked this proposal so much that the Just Right team won the contest and received a reward from the burrito maker.

Financial impact
The team performed a financial calculation at the end of its presentation that showed that implementing this project could have a very large impact on Chipotle's financials. Specifically, using Chipotle's 2013 numbers, the chain would cut costs by $107 million on $3.21 billion in sales, or 10% of its food, beverage, and packaging costs. Chipotle reported $327 million in total income that year, so if this project had been in place then and the projection came true, Chipotle would have reported 33% more income for the year.

Chipotle hasn't said anything about whether it actually plans to implement this project yet. However, its margins did come into focus with its last earnings report. Food, beverage, and packaging costs came in at 34.5% versus 33% in the first quarter of 2013, and as a result operating margin dropped from 16.5% in the prior quarter to 15%. The stock sold off after Chipotle announced that it would raise prices in response to this, but its stock price recovered later and is now over $600 versus $552 on the day before the release.

The competition
Panera Bread has also seen higher costs recently. Food and paper costs rose from 26% of sales in the first quarter of 2013 to 26.3% of sales in the first quarter of 2014. Panera is investing in its Panera 2.0 project so its margins should see continued pressure over the short term; however, the Panera 2.0 upgrades should pay off over the long run in more efficient restaurants. Panera also adjusted its menu to offer greater portion control by allowing customers to order half-sized portions.

In addition to price competitiveness, the chain thinks that portion size flexibility could also bring in customers for snacks as well. Bringing in customers outside of the lunch hour can help any fast-casual restaurant, but it's especially important for Panera because of its throughput issues. If Chipotle decides to roll out smaller burritos, that might bring in customers for snacks at other times of the day as well, although anecdotally Chipotle restaurants have customers in line at any time of day.

Looking ahead
The results that came out last quarter showed that Chipotle had to either increase its prices or cut its costs to defend its margins. At the time, Chipotle seemed like it had selected price hikes, and after a temporary panic investors seem to be OK with that now.

However, that doesn't mean that Chipotle can't cut costs as well. The chain now has a way to cut costs without sacrificing food quality that might even allow it to reward its customers, and thus increase their loyalty, at the same time.

While there's no evidence that Chipotle will put this plan into effect thus far, if it does happen it could lead to a massive EPS boost for Chipotle that would provide more justification for its high valuation.

Leaked: Could you order Chipotle from this Apple device?
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Apple, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers