Please ensure Javascript is enabled for purposes of website accessibility

How Chipotle Will Use Quesadillas to Grow its Digital Business

By Jon Quast - Jun 25, 2020 at 8:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If this plan works, Chipotle's business is about to get a lot stronger.

Some of the best performing restaurant stocks also happen to excel when it comes to digital ordering. Consider Domino's Pizza (DPZ -2.82%), for instance. Currently, around 80% of its orders are digital. The stock is up over 200% over the last five years. Also consider Wingstop (WING -3.16%). Its digital orders are 65% of sales. Its stock has returned over 350% since it went public in 2015.

It's not a coincidence.

As we'll see, digital ordering provides multiple advantages when operating restaurants and strong operations correlates with strong stock returns. It's why investors should monitor Chipotle Mexican Grill's (CMG -2.25%) progress in this area.

When it comes to digital ordering, Chipotle is already making solid progress. But it still has a long way to go. To gain more ground, it won't use flashy tech or clever ad campaigns. It intends to leverage a quesadilla.

A scanner scans the bar code on a smart phone in a Chipotle restaurant.

Image source: Chipotle Mexican Grill.

What digital ordering looks like for Chipotle

Chipotle's digital orders come in through its website and app. One could order ahead and dine in, but typically, digital supports the company's off-premise sales. Off-premise includes delivery and take out. But Chipotle also has Chipotlanes. Think of Chipotlanes as a more efficient drive-thru. Customers order ahead, pull up to the restaurant at a scheduled time, and food is quickly delivered to the car.

To facilitate these to-go orders, Chipotle has a dedicated food prep line in the back. Food waste is cut down because the company can cook more to order. The front line prepares more food beforehand, and food is wasted if managers inaccurately estimate future order volume. Labor costs are also leveraged on the back line since it can prepare more orders per employee. These are just a couple of the ways digital ordering improves restaurant operations.

Ordering through an app can benefit a restaurant in many more ways. By scheduling pickup times, throughput increases. Average ticket price increases as the app suggests other menu items customers may not have thought of. Perhaps most importantly, the company has valuable customer data. It knows who is ordering what and can track if order frequency is going up or down. These are all clear incentives for driving digital ordering

Three people eat food from Chipotle at home.

Image source: Chipotle Mexican Grill.

Digital during coronavirus

By the end of 2019, Chipotle's digital business represented 20% of total sales -- over $1 billion. Little did the company know the COVID-19 pandemic would soon accelerate adoption. As it closed all of its dining rooms, the business shifted to a 100% to-go model.

In the first quarter of 2020, Chipotle's digital sales surged 81% year over year to reach 26% of total sales. However, this accomplishment only included a couple of weeks of coronavirus impact. For March, digital sales grew 103% and represented 38% of total sales. I expect upcoming second-quarter results will show even better digital gains.

To incentivize customers to go digital during the coronavirus, Chipotle offered free delivery. This was effective but expensive since it still costs money to deliver the product. This expense was simply labeled as a customer-acquisition cost.

Chipotle doesn't mind spending to acquire digital customers, so long as they stick around. And early data is promising. On June 17, during the Evercore ISI Virtual Consumer & Retail Summit, Chipotle CEO Brian Niccol said that 70% to 80% of new digital customers are still ordering digitally.

 Chicken quesadilla slices served on a black wooden board.

Quesadillas are Chipotle's top menu request. Image source: Getty Images.

Introducing the digital-only quesadilla

Now, Chipotle needs something new to drive a new wave of digital adopters. That's where the quesadilla comes in. For over a year, Niccol has said quesadillas are the most requested menu item for the company. So, there's some serious pent-up demand for this thing.

Chipotle fans may not have to wait much longer. Quesadillas are being tested in Cleveland and Indianapolis right now --but with a catch. They can only be ordered digitally. And if quesadillas roll out nationwide, they will likely remain a digital-only menu item.

Chipotle's biggest risk to this approach is pushback from customers. How would you feel if you knew the restaurant could make you a quesadilla but won't because you didn't order digitally beforehand? So far, however, Niccol says there hasn't been any pushback in the test markets.

The are multiple benefits for Chipotle. First, if quesadilla demand is there, then it will further increase the adoption of digital ordering. Remember, digital sales are still less than half of total sales; there's still room to grow from here. But second, Chipotle's customer-acquisition cost is zero. It's not discounting anything; it's merely funneling people toward the app if they want a quesadilla.

When Chipotle launches quesadillas nationwide, this is what investors should be watching. Digital ordering improves restaurant operations and can make the company more profitable, rewarding shareholders. And if Chipotle is successful, digital-only menu items could become common across the restaurant industry.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool recommends Domino's Pizza. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,672.26 (-2.25%) $-38.47
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
$405.20 (-2.82%) $-11.75
Wingstop Stock Quote
$126.22 (-3.16%) $-4.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.