Rising Sales, Falling Profits — Chipotle’s Delivery Dilemma!
Food delivery is both a boon and a curse for the fast-food company
There is a Chipotle restaurant in my neighborhood. That same block used to have multiple restaurants and stores. As our pandemic continues to rage, most of them have shut down or moved. Chipotle continues to operate. Naturally, it must be profitable for the company to keep it open. Yet, if on a workday lunchtime, I peek inside, the store is empty. Last year, at those same time, there was a line to get in. It doesn’t take a genius to solve the conundrum. Chipotle like many other eateries is having most of its sales online. And, turns out that is both going well and badly for the company. Sales are up 14% from last year but profits fell by 19% in the same period. The savior and the culprit? Food delivery!
For the uninitiated, Chipotle is a popular fast food restaurant chain that serves Mexican cuisine (or the US spin on it). Its restaurants are ubiquitous. Everything on its menu can be made to order quickly, is not expensive, and can be eaten either in the restaurant or taken out. With the pandemic, sales have shifted to online, served by food delivery apps like Uber Eats, DoorDash, etc. This has increased sales as mentioned before. Delivery apps increase the geographical reach of the restaurant and make it easy for the customer to order. Since Chipotle’s food is not expensive, one can theoretically eat it on a daily basis without breaking the bank. Yet, despite the rising sales, profits have declined. Why? Because of two major reasons — one is the company has to pay rent on its premises that no one visits anymore and second (or the major reason) is the fees charged by the delivery apps which can often run as high as 30%. Officially, Chipotle blames the fees and says that its delivery fees don’t offset the apps’ commissions.
“Between now and next year… if delivery shifts into in-store and shifts into order-ahead and pick-up, then I’d say our margins per share are headed on the way up,” Chipotle CFO John Hartung (Reuters)
What can Chipotle do?
Let’s begin with what they can’t do- fold up their existing premises and go Ghost kitchen. Because at some point the pandemic will end and Chipotle’s original model of in-restaurant service would come back. In fact, Chipotle has opened 44 new locations in the last quarter. So, what they can do to undercut delivery apps is to promote in-store pickup. This can be done by having order-ahead drive-in options. Recently, I happened to be at Chick-fil-a which in my opinion did a great job of picking up. The order could be placed online or through their app. I told them my spot in their parking lot. The food was sent out to me right at my vehicle. Something similar can be great for Chipotle. They can also pair this with promotions like free guac etc. to get folks to do pickup instead of paying extra fees to get home delivery.
The one good thing about Chipotle is its brand. Patrons would be more willing to go the extra mile to get their burrito. Yet, it remains to be seen how successful Chipotle would be in implementing its strategy. For once, the outlet in my neighborhood is on a busy street with no space for drive-in and often no parking spot. For someone wanting to order from that location, it’d be easier to get delivery than drive to pick up. I imagine there would be many Chipotle outlets that fall in the same urban setting.