Chipotle to splurge on bigger portions to keep diners happy
Chipotle Mexican Grill Inc. is making sure its diners are getting generous serving sizes - but there’s a cost to this.
The burrito chain will take a hit by ensuring workers serve “correct and generous portions,” Chief Financial Officer Jack Hartung told analysts during the company’s earnings conference call. Chipotle found that about 10% to 15% of its restaurants were getting a disproportionate number of comments about portion sizes, he said in a separate interview.
The company is “doubling down” on training at those stores to ensure workers serve the right amount of food, including the required two generous scoops of rice and four ounces of meat. Meeting those standards will cost the company an extra $50 million, he said.
Chipotle shares slipped 2.1% at 9:36 a.m. in New York. The stock had advanced 13% so far this year through Wednesday’s close, although volatility related to a stock split and online criticism of portion sizes have eroded some of the gains in recent weeks. Last month, Wells Fargo analysts said in a note that Chipotle’s portions varied widely after ordering 75 identical burrito bowls in locations across New York City.
“We’re telling our teams, listen, we don’t want you to be skimping on portions,” Hartung said. “If you’re not sure whether to go a little more or a little less, go a little more.”
In response to the move, TD Cowen analyst Andrew Charles wrote in a research note that his team is “pleased management grabbed the bull by the horns and addressed negative publicity surrounding portion sizing that has been weighing on the investor narrative.”
On Wednesday, Chipotle reported second-quarter sales that beat Wall Street’s expectations, in part due to limited-time offers and speedy service. Transactions rose 8.7% in the second quarter, helping to propel an 11% increase in comparable sales that surpassed the average estimate of analysts polled by Bloomberg. Earnings per share also outpaced expectations.
Investor enthusiasm was tempered, however, after Hartung told analysts he expects some “margin pressure” in the coming quarters - in part due to the portion-size efforts. The biggest part is seasonal due to higher protein costs as the company shifts from a high-margin chicken limited-time offer to a brisket promotion, he said, while also pointing to higher avocado and dairy prices.
The margin guidance, while disappointing, is “not a long-term concern,” according to Truist Securities analyst Jake Bartlett.
Hartung said Chipotle has no plans for further price increases this year, adding that he expects avocado prices to ease by year-end. The company’s cost of sales in the third quarter will be around 31%, up from 29.4% in the period through June 30, when it used more oil for frying chips and more beef amid strong demand for its braised barbacoa offering.
Despite the criticisms about the portion sizes, Chipotle is one of only a handful of large restaurant chains that has consistently grown traffic in recent quarters. The results show that most diners still see the chain’s burritos and bowls as a good deal, and limited-time offers such as chicken al pastor are drawing customers in. The company has also focused on improving training so staff can serve guests quicker.
The chain maintained its full-year outlook, which projects same-store sales rising as much as a high-single digit percentage.