Shares of Chipotle Mexican Grill (NYSE:CMG) opened lower on Tuesday after some cautionary comments were made at an analyst conference. Chairman and co-CEO Steve Ells had a presentation Tuesday morning at the Barclays Eat, Sleep, Play -- It's Not All Discretionary Conference, and it didn't exactly ooze confidence.
Ells concedes that he's nervous about the chain's ability to hit the guidance it put out in late October, calling for same-restaurant sales to dip in the low single-digits during the current quarter and rise in the high single-digits for all of 2017. He also made some comments about dropping the ball when it comes to customer service and suggesting that the company may be amenable to activist Bill Ackman's call to shake up the boardroom.
Chipotle investors have already had it rough over the past year as food-borne illness outbreaks smacked the brand around. The stock has shed half of its value since hitting an all-time high two summers ago. It seemed as if the worst was behind the chain after four rough quarters of double-digit declines in comps, but now let's look at a few things that may be slowing Chipotle's revival.
There's a hiccup in the assembly line
Chipotle has a throughput problem, the issue that Ells was discussing when he admitted that the chain needs to improve its customer service. It's been clear to me the dozen or so times that I have hit up a local outpost. On Monday I drove by a Chipotle, saw a dozen people in line, and just kept driving. I had no problem waiting a couple of years ago in lines 30- or 40-deep because those went by quickly, but it's been a different story these days.
At its prime, Chipotle's top restaurants were cranking out as many as 350 transactions an hour during the peak lunch period. That's freakishly atypical. The average store rang up roughly a third as many sales per hour. However, even by the normal standards I'd bet that your typical Chipotle isn't ringing up transactions every 30 seconds or so.
There are several reasonable explanations for the deterioration of Chipotle's throughput. Let's start with the initial staffing adjustment after patrons got weirded out about playing gastrointestinal roulette when the stories began to break late last year. Here's a photo I took at 5:20 p.m. at a local Chipotle 13 months ago. There's no one in line, and just two hires working in the front of the house.
Staffing has picked up as traffic begins a gradual sequential recovery, but the employees could be out of practice. They could have forgotten the speed demons that they used to be as they put pit crews to shame with their feverish burrito-assembling skills.
Chipotle has also made things harder on itself. There are more protein choices for guests to ponder since the addition of chorizo. Mobile orders are picking up, slowing down the process for walk-ins. There's also the frenetic pace of promotions. Folks firing up their smartphones to show BOGO offers or hand over the now-defunct Chiptopia cards do gum things up at the register.
The chain also took steps to make its food safer earlier this year. While it's open for debate if the food doesn't taste as good or if the additional steps slow down the process, it's one more item just waiting to be tapped as a scapegoat for the chain's funk.
Chipotle likely lost sight of the importance of its once lightning-quick throughput. I'm not suggesting that slow service was implemented by design -- though it does make Chipotle eateries appear more busy and popular -- but it probably didn't seem like a priority when business was slow and it had bigger problems on its plate. Chipotle's paying an unknown price for the assembly line slowdown, and it's great to see Ells admit that it's a problem hungry for a remedy.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. 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.