For much of its history, Chipotle Mexican Grill (NYSE:CMG) bucked the traditional fast-food psychology around menu additions. While its rivals tend to rotate items on their menus with limited time offers, Chipotle stuck to the basics. It offered four types of meat (barbacoa, steak, chicken, and carnitas), available in burritos, bowls, tacos, or salads, with customizable toppings.
That strategy worked wonders, and Chipotle stock surged by more than 1,000% in its first decade on the market. In 2014, Chipotle expanded its menu nationally with the addition of sofritas, a marinated tofu-based entree that was its first dedicated vegan/vegetarian option. As of July of that year, sofritas made up just 3.5% of entree orders, but the item expanded the menu to vegans and vegetarians.
Last year, as the company struggled to bounce back from its E. coli crisis, it introduced another entree option, chorizo, a spicy sausage made from a pork/chicken mix, likely in a move to generate excitement about the burrito chain. While chorizo gained about 7% of entree orders, it had no discernible affect on Chipotle's sales recovery as comparable sales continued to fall by more than 20% through the summer.
Turning up the innovation
With its recently opened Next Kitchen in New York, Chipotle is finally taking menu innovation more seriously. Last year, the company said it would begin testing two desserts, and has since announced that one of them would be bunuelos, a dish made of fried tortilla drizzled with honey, sugar, and cinnamon. Chipotle serves its version with a caramel apple butter dipping sauce; it is currently available at select locations.
At its Next Kitchen, which the company unveiled earlier this month, Chipotle made waves when it revealed it was testing queso, an item that customers had long been clamoring for. In an internal memo, CEO Steve Ells noted that all of the company's competitors offer the cheesy dip and that it's the most requested item that Chipotle doesn't have on its menu. The version the company is currently testing doesn't have any artificial fillers, in keeping with company policy, and has been described as "grainy" by some reviewers, though most who have tried agreed that it is tasty. Chipotle said it could add queso to the menu in some markets as soon as a month from now.
Other items being tested at the new experimental kitchen include a salad with spring greens that comes with an avocado citrus dressing and two kinds of frozen margaritas, a virgin strawberry version and a traditional one with blanco tequila.
This is a better way
Unlike the new chorizo entree, which mostly just serves to replace an entree a customer would have ordered anyway, the new items should add incremental revenue by increasing the average transaction value. Queso, most importantly, can be an add-on with chips or on the entree itself. Desserts function similarly as an incremental item.
The salad, meanwhile, could be purchased in addition to an entree, or as a stand-alone separate item that would attract a different kind of customer. Chipotle currently has a salad on its menu, but it's just burrito ingredients served on a bed of romaine lettuce with a chipotle-honey vinaigrette. The company also offers a margarita, but not the frozen variety that it's now testing.
Beverages have historically been a weak spot at Chipotle, as the company serves Coca-Cola (NYSE:KO) products that have high-fructose corn syrup and GMOs, notably contradicting the company's Food With Integrity platform. Alcohol sales are also much slower than the broader restaurant industry at only 2% of total revenue, suggesting ample room for improvement.
Chipotle's consistent menu strategy had long been a source of strength, but in addition to the setback following the E. coli crisis, the competitive landscape has changed over the years. After pioneering the fast casual concept in the 1990s, the burrito roller is now facing a much broader range of fast casual chain fighting for consumers' lunch money.
Keeping customers excited about the menu with new items like queso is the best way for the company to increase revenue and the value of the brand.