In the restaurant business, the search for “the next Chipotle” has been something of a Holy Grail, a mythical object that people hope will bring them wealth beyond all imagination.
This search drove much of the fast-casual restaurant craze from 2013 to 2015 as chains like Noodles & Co., Potbelly, Zoe’s Kitchen and even El Pollo Loco were labeled (burdened?) as Chipotle’s heir apparent on Wall Street.
Financial media, meanwhile, searched far and wide for any chain that could one day equal the fast-casual burrito chain and earn investors millions.
But there was a “next Chipotle” there all along.
“Chipotle is the next Chipotle,” Hedgeye Risk Management Analyst Howard Penney said on the Restaurant Business podcast “A Deeper Dive.”
In the three years since Penney made that comment, Chipotle has returned to its strong, profitable growth, getting a model back that many thought might be gone for good. Its stock price, meanwhile, has tripled in value. Chipotle’s stock soared more than 10% in morning trading to top $1,700 per share, an all-time high.
To be sure, Chipotle was well established and was a good bet to recapture momentum. It had just hired former Taco Bell CEO Brian Niccol to take over for Steve Ells as chief executive. The company had started bringing common sense into its marketing—something the chain clearly needed.
Yet it had lost much of its momentum, leading to the arrival of Niccol and a move of headquarters from Colorado to California. A series of food safety incidents in 2015 soured the company’s customers on its burritos. Sales plunged in 2016—Chipotle lost $600 million in sales that year. The company closed some locations.
Chipotle’s incident was unlike any other restaurant industry food safety problem. Chipotle struggled with multi-store outbreaks of E. coli and salmonella along with some single-store outbreaks that served to remind customers of the problem.
While customers have over the years blown off singular industry issues, they did not blow off Chipotle’s.
The chain was closely watched. Its “food with integrity” tagline ushered in a generation of socially responsible restaurant concepts. The incidents blew that tagline to pieces. Yet in its marketing response to the incidents, Chipotle largely kept to the same things it had always done—fanciful Internet videos trashing corporate farming.
The result didn’t just hurt Chipotle’s sales. It hurt the company’s otherworldly business model.
What really made Chipotle tick was its ability to quickly generate returns from new stores on a national basis. The company historically has been able to pay off new stores within two years. In the second quarter of 2015, for instance, its restaurant-level margins were a remarkable 28%. By the second quarter of 2016 they fell to 15%.
While that would make more than a few chain executives envious, it was still not up to the level that had driven the company’s growth for so long. Investors quickly sour on companies that can’t generate strong returns on invested capital.
Chipotle’s profit margins are now back up close to the 25% range. And, CFO Jack Hartung said on Tuesday, its cash-on-cash returns on new units are higher than 60%.
It’s worth pointing out that some of Chipotle’s recent sales growth has come from price increases rather than traffic. Yet consumers for now appear more than willing to pay them. And, as my colleague Heather Lalley pointed out, the company has figured out how to tap into its customers’ demand for convenience.
Chipotle is now one of the 10 largest chains in the U.S., according to Restaurant Business sister company Technomic, and has regained its position as a Wall Street darling. As Penney said, Chipotle is the next Chipotle.