The marquis signs for a Chipotle restaurant in Pittsburgh's Market Square. / Associated Press The marquis signs for a Chipotle restaurant in Pittsburgh's Market Square. / Associated Press

Chipotle Says It Has Built a Profitable Delivery Business

Many restaurant operators are concerned about the negative impacts of working with third-party delivery services, from low profit margins to a sub-par customer experience with delivered food.

Chipotle, however, wants to be clear: delivery is a growing and highly profitable business for the chain.

Delivery sales increased roughly 13 times over in the fourth quarter of 2018 compared to sales generated in the channel for the fourth quarter of 2017. Chipotle CEO Brian Niccol connected the sales bump in large part to the free delivery bowl promotion that Chipotle ran from December 17 to January 7. Nearly half of Chipotle customers who cashed in on the deal were new or lapsed diners, according to the company, and there continued to be a lift in delivery sales after the promotion ended.

Niccol credited the success of the promotion to the fact that the marketing team tied it to an event (college football championships) and followed through with satisfactory customer experiences. DoorDash, which powers Chipotle’s white label delivery system, told the company that Chipotle deliveries are among the fastest in its system, and Niccol also noted that burritos and bowls are simply foods that are built to travel well. Soggy fry complaints are not a concern at Chipotle.

“To get people delicious food in roughly 30 minutes at home, while they’re watching whatever they’re watching, appears to be a good idea for our consumer,” Niccol said on the company’s fourth quarter earnings call.

There’s also been “very little overlap” in delivery sales through Chipotle’s own in-app channel and on third-party services, suggesting that it’s been worth the investment to offer delivery on Chipotle’s own website and mobile app while still fulfilling orders through third-party marketplaces.

Making Delivery Profitable

Chipotle’s chief financial officer Jack Hartung told analysts that while Chipotle still has to navigate an extra commission on delivery orders, the chain is pulling in healthy profits on delivery sales.

Chipotle’s second make line, which is an additional food assembly line outfitted in every restaurant specifically to handle off-premise orders, allows for a far more efficient delivery fulfillment process. Added onto that, Chipotle invested in digitizing each of those second make lines to make it easier for employees to complete delivery orders in a timely and accurate way.

Incoming orders are automatically categorized by the time by which they need to be made and ready for pickup, and orders in process are displayed on a large digital screen installed right above the assembly line, highlighting which ingredients need to be added to each order.

Hartung explained that the second make lines have contributed significantly to boosting order accuracy, timeliness, and there’s no crossover between those orders and serving customers who walk into the restaurant. It’s a completely separate business, allowing the restaurants to handle far more orders.

Chipotle will also be launching prepay capabilities for its delivery partners soon, so there’s no stopping to pay when couriers pick up their orders.

All that efficiency contributes to higher delivery order volumes, which is where the channel can really turn into a profitable business.

Delivery costs more for the customer, generating a higher starting profit margin for the restaurants. A barbacoa burrito bowl starts at $9.95 in Chipotle’s Manhattan locations. The same order, selected for delivery on Chipotle’s own website, starts at $13.94, not including tax and tip. As long as delivery order volumes stay as high as they are, and are simply adding on to in-store order revenue, it’s a good business for the chain.

Chipotle still pays a delivery fee to the third-party services that it uses, but “right now, the incrementally is so high that as long as these are extra, additional customers coming to Chipotle, we can cover the fee,” Hartung explained.

“It’s not just that it’s profitable, it’s accretive to our [overall] margins the way we’ve got it set up now,” he added.

Sales Results

Chipotle reported an increase in restaurant level operating profit margin from 16.9 percent in 2017 to 18.7 percent in 2018, according to its full-year earnings report. Digital sales grew 65.6 percent in the fourth quarter compared to the same period last year, now accounting for 12.9 percent of total sales.

Comparable store sales increased by 6.1 percent in the fourth quarter compared to the same period last year, which the company attributed in large part due to successful year-end marketing campaigns.

Chipotle shares were up nearly 10 percent in after-hours trading immediately after the company’s earnings call.

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