Popular restaurant chain Chipotle Mexican Grill (CMG 2.41%) is looking to robots to usher in a new era of fast-casual dining. For nearly two years, the burrito expert has experimented with food automation technology. And on Oct. 3, the company announced its latest step forward.
Chipotle is now testing robotic food preparation at its test kitchen in California. Here's what this could mean for the stock if these tests go as well as management hopes.
Chipotle's growing expertise in food tech
In the second quarter of 2023, Chipotle had nearly $2.5 billion in food and beverage sales. And 38% of these sales were digital orders. The company has done a good job at growing this part of the business, as many of its customers prefer to order ahead for pickup or third-party delivery.
Digital orders are great for Chipotle because it can increase restaurant throughput -- there are fewer people taking up time and space in a line. But with the growth of digital orders, the company has had to invest in a separate food prep line to handle the sheer volume coming in. One line handles guests at the front. The other line handles digital orders in the back.
According to Chipotle's management, 65% of digital orders are for bowls (basically a burrito without the tortilla) and salads. To further create restaurant efficiencies, therefore, the company needs to focus on these two very important menu items.
And this is where its new robot comes in. In July 2022, Chipotle provided venture funding to a start-up called Hyphen. Now, the company is testing food prep at its test kitchen using an automated food assembly machine built by Hyphen. The device only makes bowls and salads.
If this new device works, it could dramatically increase efficiency and output for Chipotle. The machine will assemble salads and bowls beneath the food prep line for digital orders. Meanwhile, employees can prepare other menu items above.
As mentioned, this isn't Chipotle's first foray into food tech. In March 2022, the company announced Chippy -- a chip-making robot. Then in July, it announced Autocado -- a robot that preps avocados before an employee turns them into guacamole.
What does this mean for Chipotle stock?
I won't deny that Chipotle stock has always traded at a premium valuation, even during tough times. And its current price-to-earnings (P/E) ratio of 46 is actually cheaper than average for this company. That said, I nevertheless believe it will be hard for this to be a good investment from here if its profits go down.
CMG PE Ratio data by YCharts
Why might Chipotle's profits drop? Expenses are shooting up all across the restaurant industry. Chipotle already enjoys a world-class restaurant-level operating margin of 27.5% in Q2. With profit margins already so high, it may be harder for the company to pass on higher expenses to customers by further raising menu prices.
Therefore, the better option for handling higher expenses is to find ways to save money. Robotic automation helps in that regard. Chipotle is already succeeding in efficiency even though its nascent "robot fleet" is still in the testing phase. In the first half of 2022, labor expenses came in at 25.6% of revenue. In the first half of 2023, labor expenses dropped to just 24.5%.
It's possible that labor expenses as a percentage of revenue could drop further if Chipotle has one robot making chips, another making guacamole, and a third making bowls and salads. However, investors need to realize that companies often test things that ultimately don't get implemented.
Moreover, with nearly 3,300 locations, it would take Chipotle a long time to roll out its robots in real life and start seeing the benefits of those tech upgrades.
Therefore, don't expect Chipotle's robots to move the needle for the business anytime soon. But it's something to keep in mind when building a long-term investing thesis because it could be instrumental in keeping profits up.
