Less than 18 months ago, Chipotle Mexican Grill executives were crowing about the incrementality of their delivery program.
“Our second make line is very, very efficient and our incrementality, our model, drives a high margin on incrementality,” CFO Jack Hartung told analysts in April 2019. “The margin that we get on the delivery business is higher than the 21% (generated during the quarter).”
Today, however, with the pandemic still an everyday reality and consumers continuing to seek off-premise options, Chipotle is discovering it just may be the victim of the overwhelming success of its delivery operation.
The Newport Beach, Calif.-based burrito chain reversed its negative same-store sales from the early days of the coronavirus crisis, reporting an 8.3% jump in comparable restaurant sales for the period ended Sept. 30. But Chipotle also reported Wednesday that its operating margins for Q3 were 19.5%, down from 20.8% during the same period last year.
Higher delivery costs associated with increased delivery sales were cited as the top reason for the dip, coupled with rising beef prices, fewer sales of high-margin drinks and increased orders of steak.
Further, Chipotle executives said they expect those reduced margins to remain throughout Q4 and, potentially, beyond.
“In terms of looking forward a year from now, it’s really hard to answer that question,” Hartung said Wednesday. “I will tell you this: It all depends on delivery. Delivery is the channel that attracts a premium … We had about a 15% shift that was in-store customers that went to delivery. And we all know that delivery brings a much cost … If delivery shifts into in-store and shifts into order-ahead and pick-up, then I would say our margins, for sure, are headed on the way up. If delivery stays the same or increases, we’ll have some challenges.”
So, Chipotle is doing virtually everything in its power to steer the delivery fans it cultivated for the past couple of years into other ordering channels.
The brand opened 44 new restaurants during its third quarter, 26 of which included order ahead-pickup Chipotlanes.
Not only are stores with Chipotlanes generating about 10% higher sales than those without, they also see fewer of those low-margin delivery orders. It costs about $75,000 to $100,000 extra to build a drive-thru location, Hartung noted.
“So, it’s a meaningful change in margin,” he said. “And obviously, when you go through the math, the returns are extraordinary on that extra $100,000 investment.”
Chipotlanes will be included in the majority of new stores going forward, CEO Brian Niccol said, with the chain converting existing stores or even relocating them to add on drive-thrus.
Chipotle is also exploring menu pricing as a way to offset delivery costs and, potentially, push customers to go the pickup route.
The chain is currently testing models with 7%, 13% and 17% price increases for delivery.
Chipotle noted that it lowered its white-label delivery fee from $3 to $1 at the pandemic’s outset, offsetting some of the jump in menu prices.
“So, for folks that are shopping in our white label, it’s a really, really good value,” Hartung said. “If they’re shopping in marketplace, it depends on what the others are charging for their delivery fee, which we don’t have control over.”