When Chipotle Mexican Grill (CMG 6.33%) reported first-quarter results on April 26, investors had plenty to cheer about. Revenue jumped 16% year over year, while earnings per share soared 26%. The fast-casual pioneer is still benefiting from the strong momentum that has been propelling it over the past few years.
The business's store opening pipeline remains robust. Of the 51 new stores opened during the quarter, 42 were built with a Chipotlane, the company's popular drive-through option. And management expects roughly 80% of the 235 to 250 new stores planned in 2022 to come equipped with a Chipotlane as well.
Here's why these new layouts have been a boon for the business.
Image source: Chipotle Mexican Grill.
Improving the customer experience
Chipotle's current CEO, Brian Niccol, previously worked at Taco Bell, so before introducing the first Chipotlane in 2019, he was already familiar with how valuable having a drive-through can be. From a consumer perspective, they reduce friction while increasing accessibility and convenience, which help to support higher sales.
What differentiates Chipotle's drive-throughs from traditional fast-food restaurants is that orders are placed ahead of time using the company's website or mobile app. Because of the customizability of the orders, having a menu board on site and letting customers order on the spot would result in a poor guest experience. Instead, the restaurants have second make-lines dedicated only to online orders to avoid interrupting the in-store experience.
"On average, it only takes about 10 minutes from the time a guest places an order until it's ready for pickup, which is simply outstanding," Niccol highlighted on the recent earnings call.
The success of this channel, particularly during the depths of the coronavirus pandemic, isn't surprising. Chipotle has always been a forward-thinking restaurant when it comes to optimizing its restaurant operations and bolstering its technological foundation.
Launched in March 2019, the business's loyalty program now counts almost 28 million members. For comparison's sake, Starbucks, which introduced its top-notch rewards program nearly a decade before Chipotle, has 26.7 million members in the U.S. (as of April 3).
Chipotlanes also give management the flexibility to test new offerings going forward. Digital-only items like the quesadilla, which represented 10% of total transactions in Q2 2021, can help bring new customers to the platform. The company could also keep just the drive-through open for breakfast, if they one day offer it, or for late-night ordering. It's all about meeting customers where they are.
Enhancing the financial picture
What's interesting is that Chipotle long turned down the idea of adding drive-throughs to its footprint, which now totals roughly 3,000 locations. Management instead wanted to emphasize the in-dining experience, but to continue on their growth trajectory and to appease shareholders, businesses do end up doing things they once shunned.
Sales in 2021 increased 26.1% year over year to $7.5 billion. Consensus forecasts call for revenue to rise at a compound annual growth rate of 14.2% over the next five years. This positive outlook was undoubtedly spurred by these new store formats.
Niccol is extremely confident Chipotle can one day have 7,000 stores open in North America. And Chipotlanes are a big part of that push. That's because they allow the company to further penetrate markets that previously seemed mature, extracting even more value over time.
New Chipotlane restaurants, on average, open with 20% higher sales and better margins and returns than regular stores. What's more, digital pickup orders produce the highest margins, so having more drive-throughs translates to better profitability. Chipotle's restaurant-level operating margin of 20.7% in the first quarter should only expand in the years ahead.
What seemed like such an obvious strategic decision, introducing Chipotlanes, actually involved careful analysis and planning. And so far, it is working tremendously well. Shareholders should appreciate how innovative this top restaurant business is. That forward-thinking attitude can push the company to new heights.
