Reporter's Notebook
Chipotle Mexican Grill rethinks real estate development

Chipotle Mexican Grill rethinks real estate development

This post is part of the Reporter's Notebook blog.

Literally for months, Wall Street analysts have been predicting that Chipotle Mexican Grill’s recovery would be long and drawn out.

So it really shouldn’t be a surprise that second-quarter same-store sales trends were a bit disappointing to all involved — especially the chain’s top executives, who seemed to barely hide their frustration with the slow pace of the recovery during an earnings call with analysts Thursday.

Chipotle execs up to this point have stubbornly stuck to their guns about the pace of development, which is expected to be in the 11 percent to 12 percent range this year, with the opening of 220 to 235 units planned.

Analysts, meanwhile, have repeatedly suggested that it might be time to slow things down a bit, to focus less on building new restaurants and more on turning same-store sales positive again after a series of foodborne illness outbreaks last year knocked high-flying Chipotle off its successful trajectory.

On Thursday, Chipotle executives finally opened the door to the idea of slowing the pace of development. Sort of.

Monty Moran, Chipotle’s co-CEO, said the chain still plans to add its 220 to 235 units in 2016, and 116 locations have already opened.

There’s also still a strong pipeline of real estate locations under consideration, he said. But now the real estate team will refocus on “assessing future openings with a more conservative lens that takes into account our current economic model,” Moran said.

Chipotle’s average unit volumes have declined to about $2 million, compared with $2.5 million a year ago, as a result of what executives are now calling simply “the crisis.”

So Chipotle will “temporarily” direct new unit development to markets with the strongest track record of opening sales, he said.

“This may slightly temper the number of openings in these markets in the near term as we look to rebuild our sales momentum and will help us ensure strong new store productivity,” said Moran.

The company has not given unit count guidance for 2017 yet, but Moran said that doesn’t mean the number of openings will be impacted.

Efforts to re-prioritize the market mix may not be realized until late next year, he said. More updates on that are promised.

Meanwhile, the chain has been working on design and procurement to bring down average investment costs. The team is also working with landlords to get them move involved in build-outs. The result: investment costs at about $800,000 for 2016, despite the increased cost of materials and labor.

David Tarantino of Robert W. Baird & Co. wrote in a report Friday that the impact of the foodborne illness crisis has had a more severe impact on newer units not in the comparable store base. He estimated sales volumes for those units to be near $1.4 million on an annualized basis, well below the $1.8 million to $1.9 million target for new units.

It should be noted that Tarantino still sees Chipotle as having the potential for 5,000 units in the U.S. It may take time, but he sees the brand making a full recovery, starting with a strong bounce back in 2017.

Andy Barish of Jefferies LLC, meanwhile, in a report described Chipotle as a “broken growth company” that will eventually have to slow unit growth, though that could be a good thing in the long run as the chain’s performance improves to pre-crisis levels.

And Stephen Anderson of Maxim Group in a report Friday sees Chipotle shifting to a period of single-digit unit growth.

Anderson also predicts that slowdown in pace will impact secondary brands ShopHouse Southeast Asian Kitchen and Pizzeria Locale, which Anderson predicts will grow at the more measured pace of five to 10 units per year.

Chipotle ended the second quarter with 15 ShopHouse locations and four Pizzeria Locale units among the more than 2,100 restaurants in the company’s portfolio, which also includes 27 Chipotles in Europe.

This all could be good news for fans of the brand in Small Town, Ohio, who might like to see more Chipotles coming their way. Ohio is where the recovery has been strongest so far, with same-store sales down only 12 percent in the second quarter.

New units may be more likely to perform there than in, say, the West, where the E. coli outbreak first erupted last November, and where same-store sales were down 26 percent.

Contact Lisa Jennings at [email protected]
Follow her on Twitter: @livetodineout

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