Chipotle's Q4 earnings included a 5.6% increase in comp sales versus 7% expectations. Though positive, CFO Jack Hartung simply described the quarter as “tough” during the company’s earnings call Tuesday afternoon. Notably, much of the company’s sales increase came from 13.5% menu pricing. Transactions were down by 4%.
Comp sales have decelerated from Q3, which were up by 7.3%, and Q2, which were up by 10.1%. Such deceleration could illustrate that persistently high inflation is taking its toll on consumers who are tightening their spending. Chipotle’s consumers are reining in their delivery habits at the chain, for instance, with transactions in the channel down by 15% in Q4. Digital sales have settled around 37.4%. For context, digital sales for all of 2022 were 39.4% versus 45.6% in 2021. However, in-restaurant sales were up by 17.5%.
“We’ve reset the delivery business to be now where it makes sense economically and, as such, our order-ahead business has started to show the right trajectory. And then obviously our in-store business has shown tremendous acceleration,” CEO Brian Niccol said on the call.
Niccol added that consumer demand “looks to be there,” especially among higher-income consumers. Purchase frequency for consumers making $100,000 and above have increased. That trajectory has provided some optimism for executives, who pointed to expanding average unit volumes (now at $2.7 million) and restaurant-level margins (at 24%, about 380 basis points above last year), as well as transaction trends turning positive at the start of 2023.
Niccol added that operational and staffing improvements are well underway, with 90% of the system fully staffed and the reduction of virtual training in favor of “shoulder-to-shoulder training.” He said December was one of the company’s best months in the past two years for both hourly and salary turnover rates. To maintain operational momentum, Chipotle is testing a new grill that is faster and more consistent for both chicken and steak, Niccol said. It also “lowers the learning curve significantly.” The company is currently moving into a multi-store test of the grill.
“It just gives our teams a tool that allows them to cook the chicken perfect every time and a lot faster – significantly faster. And the same goes for steak,” Niccol said.
And, the company is currently developing and testing Hyphen, a foodservice platform that automates meal assembly on the digital makeline. The system is part of Chipotle’s Cultivate Next Fund, initially announced last year, and is expected to help with speed and accuracy.
“This would allow our restaurant teams to focus more on our in-restaurant guests on the frontline, further improving throughput,” Niccol said. The first makeline prototype is currently in development and the company will test and learn in the first half of this year.
Notably, the chain’s growth momentum continued on the quarter, with 100 new restaurant openings – 90 of which included a Chipotlane. The mobile-order-ahead model generates higher sales and margins than the company’s traditional model. The company is on track to open 255 to 285 new restaurants this year, with at least 80% including a Chipotlane.
Additionally, Chipotle increased its Rewards members by 20% in 2022, to 31.6 million. Sixty percent of promotions on the year were personalized and the company plans to increase this work moving forward, including through new incentives like Freepotle. Such perks are aimed at keeping people engaged in the loyalty program, Niccol said.
“We know when people are engaged in our Rewards program, we get more purchasing frequency out of them. The most engaged people come through our digital business when it comes to our Rewards program,” he said. “I think the combination of high engagement with Rewards specifically around the amount of personalization we’re doing will result in more frequency out of customers down the road.”
Contact Alicia Kelso at [email protected]