Chipotle (CMG 0.40%) just had its most profitable quarter ever.
In the midst of the coronavirus pandemic, the company delivered adjusted earnings per share of $5.36, up 74% year over year. That accomplishment shows how far the company has come from just a few years ago when it was still reeling from the E. coli crisis.
Half of Chipotle's sales in the quarter came from the digital channel, an option that is only a few years old, and digital sales jumped 134% in the quarter to make up about $870 million in revenue.
Despite the headwinds from the pandemic, Chipotle stock is up 109% since the start of 2020. The company has executed effectively during the crisis and leaned on the digital channel to not only replace lost sales in dining rooms but also to grow the overall business. Comparable-sales jumped 17.2% in the first quarter with two-year comps up more than 20%. Chipotlanes, the company's drive-thru concept, are a key component of that digital strategy, and in tandem with digital ordering, Chipotlanes have the power to significantly increase the company's growth potential.
Image source: Chipotle.
Burrito-to-go
Chipotle introduced its drive-thru in 2019. Even though the concept has long been a proven sales driver for much of the fast-food industry, the company resisted adopting it due to a seeming incompatibility with the restaurant's burrito assembly lines. Digital ordering changed all that. With a mobile app, customers can place their orders in advance, making the drive-thru a convenient fit.
Since launching the first Chipotlane, the company has quickly embraced the strategy, seeking to modify its existing real estate to add drive-thru lanes and including them in most of its new locations.
Last year, the company opened 100 Chipotlanes, and it finished the first quarter with 196 total. By the end of the year, it will have at least 300. With 70% of new openings including Chipotlanes, management expects a majority of its restaurants will eventually have one.
Digital ordering and delivery have been a lifeline for Chipotle during the pandemic, but delivery carries lower margins than pickup orders. The company raised its delivery order premium to 17% to account for the added cost and to encourage customers to pick up orders at the store, but delivery orders are still less profitable, management said. Chipotlanes, on the other hand, are a strong contributor to order ahead for pickup, which is its most profitable channel.
CEO Brian Niccol explained on the first-quarter earnings call, "We also continue to see outsized digital performance in Chipotlanes, which have revolutionized the drive-thru experience toward order ahead for pickup transactions, which is our most profitable channel." In other words, Chipotlanes help shift delivery orders to pickup orders and provide a level of convenience with pickup that would otherwise be unavailable.
Chipotlane-equipped locations also have 17% higher digital sales than restaurants without one, comparable sales are higher at restaurants with Chipotlanes, and sales start higher at new restaurants that have Chipotlanes.
Expanding capacity
Niccol said the company's long-term goal is to open at least 6,000 restaurants with over $2.5 million in average unit volumes and restaurant-level operating margin above 25%. The truth is, Chipotle will have to exceed those numbers to deliver value for investors based on the current stock price, but the expansion of Chipotlanes looks like the perfect way to outperform management's targets.
Opening drive-thrus will expand the company's growth potential, adding value to high-traffic corridors where customers are more likely to order through a Chipotlane, and enabling it to open in locations where it might not otherwise. Its ability to drive higher margins is also key, as digital sales are only likely to grow as a percentage of Chipotle's overall revenue in the coming years.
There's a reason why the drive-thru is such a popular option in fast food: It's convenient and it works. McDonald's, the No. 1 fast food chain by sales in the world, has more than 25,000 drive-thru locations across the globe. About 95% of its more than 13,000 U.S. locations have drive-thrus, and 65% of its domestic sales come from drive-thru locations, showing the power of the concept.
In that light, embracing the drive-thru lane only makes sense for Chipotle. While diners may not be able to customize their burritos at the order line, regular customers can still order their favorites with just a few taps on their smartphones on the way to the restaurant.
The benefit to the customer is clear, and it's both a sales driver and a high-margin channel for Chipotle. Over the long term, Chipotlanes should be a significant tailwind for the burrito chain.
