Chipotle Mexican Grill (NYSE:CMG) has built its popularity around a small menu of dishes that are highly customizable: Your burrito is made your way, right in front of you, with fresh, healthy ingredients -- and that formula has won the chain millions of fans.

But the fast-casual favorite has struggled when it comes to adding new menu items. It struck out with its attempt to add chorizo sausage as a protein choice, and its much-ballyhooed launch of queso ... underwhelmed, though the cheese sauce -- with its recipe tweaked -- remains on the menu.

CEO Brian Niccol now believes the company has figured out a better method to test potential new offerings before rolling them out nationally. The chain has been developing dishes at its NEXT test kitchen in New York, and then using a Stage-Gate process to test them.

In less jargony terms, the company will craft a menu item at the test kitchen, launch it in just a few restaurants, and slowly expand its availability to a larger set of them, taking feedback at every stage. If the response is good, management may move ahead to launch it nationally; if there's consumer pushback -- consider the visceral loathing inspired by that first, too-grainy queso recipe -- then it's back to the drawing board.

The inside of a Chipiotle.

Chipotle Mexican Grill has a new process to test potential menu additions. Image source: Chipotle.

What's next on the Chipotle menu?

"The furthest along is Carne Asada [a thinly sliced, grilled beef] which I am pleased to announce is nearing validation through our Stage-Gate process, after which we will decide on the timing of a potential national launch," Niccol said during the company's second-quarter earnings call. "This item is easy to execute operationally, has a unique flavor profile, and is receiving terrific customer feedback in our test markets. We are also gaining valuable feedback on our quesadilla pilot with the good news being that customers really love it."

Chipotle has also been testing new ovens in its restaurants that will allow it to offer full-sized quesadillas. It had previously only offered a kids-menu quesadilla made using smaller tortillas.

"The new ovens are helping to improve the quality and taste of the quesadillas, and could potentially be a platform for other new menu items including desserts and nachos," the CEO said. "That being said, we still have some work to do in order to streamline our workflow. As I've stated previously, we are not going to roll out new menu items at the sacrifice of throughput."

Niccol, who previously was Taco Bell's CEO, clearly understands the value of offering people something new on the menu when it comes to luring customers through the door. He also knows that Chipotle has a more demanding and less forgiving core customer base than his previous employer. The fast-casual Mexican chain can't just throw a lot of ideas at the wall to see what sticks.

Piquing diners' interest

When a restaurant doesn't innovate, customers get bored. You may like Chipotle, but if you visit it often enough, you'll get menu fatigue and start patronizing some other eatery. Niccol believes that selectively adding new items can keep current customers engaged as well as bring in new ones.

"The menu innovation, we view it as -- it should be able to drive incremental sales transactions," he said. "The reason why is because it does give people an experience that they don't get out of their everyday experience. So it gives them a reason to either come more often or maybe come and try us for the first time.

Niccol also admitted that the company does not fully understand how changes to the menu will motivate behavior. So the slow rollout and testing process will further the chain's understanding of its customers.

"And as we do these tests, that's what we're really trying to understand. How much of this is, hey, this is just among our existing user, that's coming more often because we've now added another occasion form," he said. "Or you know what, we've now piqued somebody's interest that has never had the opportunity to try Chipotle in the past."

Not every potential new menu item will pass muster, but this more-careful testing process should dramatically improve the company's success rate for those that make it to a national launch. The challenge -- which Niccol seems to have under control -- is figuring out a cadence for introducing those new menu items that keeps existing customers coming in while also attracting new ones.

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