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Is Menu Fatigue Chipotle's Newest Problem?

By Jeremy Bowman - May 30, 2016 at 1:58PM

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Deutsche Bank analysts claim Chipotle's customers are sick of its menu. Could this hold the key to recovering lost sales?

It's been nearly six months since Chipotle Mexican Grill's (NYSE: CMG) last foodborne illness outbreak, but the burrito chain has struggled to bring back lost customers despite free burrito giveaways and other promotions. 

Same-store sales plummeted 30% in its first quarter, and showed little sign of improving in April. Now, according to reports, Chipotle is facing a new problem: menu fatigue. Customers, in other words, are tired of its bill of fare, which focuses around five proteins available in burritos, bowls, tacos, or salads, and has barely changed since its first restaurant opened in 1993. 

Deutsche Bank analysts Karen Short and Brett Levy wrote earlier this year, "We believe [Chipotle's] success made them a bit complacent (although not with its desire to expand its store base or improve in-store operations) as the company's lack of interest in innovation over the last decade has resulted in what we consider to be menu fatigue."

The analysts cited Chipotle's lack of data analytics for its inability to keep up with customer trends, and said the proliferation of competitors offering fast, fresh, customizable food has eroded its value proposition.

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It's true that Chipotle's menu has hardly changed in the company's 23-year history. In 2014, the company added the tofu-based Sofritas as an option, but other than that there have been no significant changes. The customizable add-ons, including beans, peppers, onions, and four different kinds of salsa, result in over a thousand different combinations one can order, but those recipes and options have been consistent over the years.

Bucking the fast-food trend 

Chipotle has long prided itself on being different from traditional fast-food eateries. The company considers "changing the way we eat" to be its mission, and focuses on responsibly sourced ingredients it calls "Food with Integrity." Unlike legacy chains such as McDonald's (NYSE: MCD), Chipotle has eschewed traditional advertising methods such as TV, choosing instead to market itself through long-form videos and other creative channels. It refuses to franchise, and the burrito chain avoids meal pricing and other forms of discounting that are common among the big burger chains. Most importantly, perhaps, Chipotle has rejected the familiar limited-time-offering (LTO), a staple of fast-food strategy. 

Not only is the LTO popular at burger slingers like McDonald's and Burger King, but it's also found at higher-end chains closer to Chipotle, like Starbucks and Shake Shack. There's a good reason for its popularity: LTOs act as a centerpiece for marketing campaigns, and give customers a good reason to visit the restaurant. 

Chipotle says it keeps its menu small and avoids LTOs to ensure quality. Up until now, it's been hard to argue with that strategy, as the burrito champ has been one of the best-performing restaurant chains in the country -- but there's evidence another big menu addition may be in-store.    

On the recent earnings call, Chief Creative Officer Mark Crumpacker said the company was considering a number of menu additions, the first of which was likely to be chorizo. Chipotle tested the sausage entree in its Kansas City stores last year, and called it "very, very popular."

It's unclear if chorizo will be the traffic driver management hopes it will, but the company's openness to new items is a step in the right direction. Chipotle has rejected seafood as a menu addition in the past, saying it has a shorter shelf life than beef, so the range of potential new offerings may be somewhat limited -- seafood would appear to be the biggest category missing from its menu.

Is menu fatigue really to blame?

Considering Chipotle's sales were skyrocketing just two years ago, it's hard to pin the blame for lingering weakness on a stale menu, especially when Qdoba, arguably its closest rival, has seen weak same-store sales growth lately.

Chipotle's menu is the biggest reason for the chain's success, and competitors ranging from McDonald's, with its Create Your Taste menu, to start-ups have attempted to imitated it, showing how a focused, customizable menu is realigning fast food.

But Chipotle is struggling today, and a new menu item or limited-time offer seems to be the easiest way to get customers excited about the brand again. There's no word about when chorizo would roll out nationally, but I'd expect that to be a top priority if sales continue to slide.

Down the road, the company may have a better card to play in a fight against any potential menu fatigue -- expanding its two seed concepts, ShopHouse and Pizzeria Locale. Chipotle has opened just a handful of each restaurant, but ramping up their expansion would give fans of Chipotle a chance to have a similar experience with a different cuisine.

The hangover from last year's food-safety issues may be lasting longer than expected, but plenty of opportunities remain for the company to bring back lost customers. Mixing up the menu is a good start.

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Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,306.80 (-0.04%) $0.46
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McDonald's Corporation
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