Investors sold off Chipotle Mexican Grill, (NYSE:CMG) stock last week following a weaker-than-expected earnings report. Though the burrito roller posted a comparable sales increase of 10.4%, that was actually its worst performance in that category in five quarters, and the market was turned off by projections of comparable sales growth in the low-to-mid single digit range for the year.
Still, there was a curious item in the earnings call that could portend a future explosion in sales. Chief Creative and Development Officer Mark Crumpacker told the audience that Chipotle had begun delivering its fare with the help of Postmates, a delivery website and app, in 67 cities across the country. The partnership began in March, and the earnings call last week was the first public announcement Chipotle had made about it. Crumpacker said delivery orders had already grown 30% from March to April.
How it works
Customers can order through the Postmates website or mobile app from select locations in their area. Delivery won't come for free, however, as the price will vary between $5-$8 depending on the distance traveled. While that fee could break the bank for individual customers, it's easy to see an office or another small group taking advantage of such a service in spite of the additional charge.
Websites like Postmates had offered Chipotle delivery in the past, but Crumpacker said the restaurant chain had tried to shut them down as management had doubts about quality control issues as well as a general lack of control over the service. However, the current arrangement with Postmates is an official partnership, and since it's now being publicized for the first time, the growth potential could be enormous. Crumpacker said, "There is a tremendous amount of potential for individual orders, but it's a little bit too early for us to predict what long-term impact that will have."
Why it could be huge
As anyone who's been to the average Chipotle during lunch time knows, the company is not suffering from lack of demand. Lines are long, but the assembly line food prep model means you get your food before you pay for it. Throughput, the number of customers Chipotle can serve in a certain amount of time, is a much-discussed topic among management on earnings calls as the company is constantly looking for ways to serve more customers during peak business hours. Of course, the long lines also lead some potential customers to turn around and search elsewhere for lunchtime grub.
Delivery and catering, which Chipotle is also trying to grow, are easy ways to do this. The bottlenecks in Chipotle's system are not in the kitchen -- they're in the ordering process at the make line and cash register. Therefore, by adding delivery, the company can take more orders during peak hours without burdening the assembly line and making customers wait longer. Similarly, using delivery is in the customer's interest as it will help them avoid the long lines they would otherwise need to tolerate to get their hands on a warm burrito.
Though investors seem nervous about Chipotle's slowing sales growth after a red-hot 2014, the delivery rollout is a reminder that there are several potential add-ons that could further juice sales. After all, Chipotle's average restaurant sales now match McDonald's among the industry leaders and that's without the burrito chain offering breakfast or drive-thru, two sales drives that have become staples of the legacy fast-food chains.
Though the stock's performance in 2015 may not live it up to last year's, as long as the demand and the long lines are there, Chipotle will find new ways to serve its customers, and profits and the share price will keep moving higher.