A sofrito burrito in promotional image from Chipotle. / Chipotle A sofrito burrito in promotional image from Chipotle. / Chipotle
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Chipotle Needs to Get More Customers Into Its Restaurants

Chipotle Mexican Grill Inc. has stepped far back from the abyss it found itself in after a food-safety scare and more prosaic problems like slow service. But so far, there’s a missing ingredient from its turnaround: greater foot traffic.

The burrito chain reported Thursday that comparable sales grew 4.4 percent in the third quarter from a year earlier, an improved result that signals the beleaguered restaurant is getting on steadier footing under its new chief executive, Brian Niccol, who decamped from Taco Bell earlier this year.

But that growth has a soft underbelly. The company said it was driven by higher average checks, which reflects both the mix of products ordered and a 3.8 percent increase in menu prices. Transactions, a proxy for traffic, fell 1.1 percent over a year earlier.

Executives’ comments on the earnings conference call didn’t give me much hope that this figure would look materially better in the fourth quarter: For the quarter to date, traffic is just about flat.

I know it is early in Niccol’s tenure, and I’ve written previously that he’s taking sensible steps to shore up the business. I still think that’s true, and the company’s improved restaurant-level margins, which rose to 18.7 percent in the quarter, offer evidence of that.

Nonetheless, Chipotle is stuck in an unsustainable pattern. To be fair, some of its peers are right there along with it. McDonald’s Corp. reported earlier this week that guest counts declined again in its U.S. business, even as it managed to deliver a 2.4 percent increase in comparable sales from a year earlier. Starbucks Corp., too, has a traffic problem in its home market. In fact, this is a persistent dynamic industry-wide:

But Chipotle restaurants are not as ubiquitous as McDonald’s or Starbucks stores, and the burrito chain remains up against rather easy comparison figures because it is still climbing out of the traffic crater caused by food-safety problems a few years ago. It shouldn’t be this hard to notch a traffic win.

I have similar thoughts about Shake Shack Inc., which is set to report earnings next week. I can easily see why investors salivate over its unit economics; the $4.1 million in average yearly sales volume it projects for its stores this year is staggering. But the chain routinely records declining foot traffic, with comparable sales increases coming entirely from price and mix.

Executives say that at this early stage of its expansion, some of the traffic is probably just migrating to other Shake Shack locations that are not yet in the comparable sales base. But they also have blamed weak traffic on factors such as weather. That’s not a terribly compelling excuse, especially for a buzzy startup. I remain baffled that investors are so forgiving of this weak traffic.

Chipotle’s Niccol has good ideas to get more people eating burritos. In particular, he has been pushing to transform the company into a more fearsome e-commerce machine, adding delivery capabilities to more restaurants and equipping its burrito “make lines” with technology that helps with the speed and accuracy of digital pick-up orders.

As I’ve noted before, winning on digital ordering is the dining industry’s best chance for long-term growth. Chipotle’s digital sales surged 48.3 percent in the quarter from a year earlier — an indication that it is making headway on this important battlefield.

If I were an investor, I’d wait to see more from Niccol before pumping up this stock price any further. As of Friday morning, Chipotle shares were up 48 percent year-to-date, making it one of the biggest gainers on the S&P 500 Index. Even before Niccol was named CEO in February and offered investors fresh reason to believe in a turnaround, the shares were trading at a significant premium to others in Chipotle’s industry peer group.

Remember, we still don’t have a clear sense of how consumers will respond to some of Niccol’s key initiatives. Chipotle’s new loyalty program is only in pilot phase. Menu innovations such as bacon toppings are also still in test mode at a limited number of locations. These things could very well move the needle for Chipotle — but we just don’t have enough evidence yet to even get a hint.

I’ll be much more convinced Chipotle’s comeback is the real deal if it can turn the corner on its traffic problem.

©2018 Bloomberg L.P.

This article was written by Sarah Halzack from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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