Some of the best performing restaurant stocks also happen to excel when it comes to digital ordering. Consider Domino's Pizza (NYSE:DPZ), for instance. Currently, around 80% of its orders are digital. The stock is up over 200% over the last five years. Also consider Wingstop (NASDAQ:WING). 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 (NYSE:CMG) 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.
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
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.
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.