One of the features that stands out to investors about Chipotle’s potential is its development pipeline. The company is targeting 7,000 North American restaurants, from its current 3,268-unit count, and is starting to ramp up its international expansion as well.
To understand its pace of growth, CFO Jack Hartung joined the brand shortly before its 10th anniversary, when it had just over 200 restaurants. Earlier this month, Chipotle marked its 30th anniversary, so it’s gone from 200 to over 3,200 in two decades.
Chipotle is on pace to open 255 to 285 new units this year, or an 8-to-9% clip. And, the company expects to accelerate that to up to 10% if it could just get through some of its lingering bottleneck challenges.
Those challenges are certainly not unique to Chipotle. Things like permitting and utilities delays have been hindering the industry throughout the past several years, much of it triggered by the global disarray caused by Covid and some of it continuing with staffing shortages or work-from-home employees at the municipal level. You could sense some impatience about this hindrance during the company’s Q2 call Wednesday.
“It’s really down to things that are under city control, like getting utilities to the site. Sometimes it takes weeks to just get somebody to come out and make sure we have utilities in,” Hartung said. “It involves things like permitting … inspections. So, a lot of these cities … to get somebody to show up when they need to show up and do the work has ben a real challenge.”
Hartung said the company is “calling, calling, calling” those cities to make sure Chipotle is at the top of their work list.
“If they hear from us more often, it’s likely they’re going to move it,” he said. “So that’s the strategy to try to hopefully remove that bottleneck.”
Once Chipotle is able to work through some of these delays, an acceleration in unit development should manifest, especially as unit economics continue to improve; restaurant-level margins on the quarter improved to 27.5%, from 25.6% in Q1 and 24% in Q4. In a note, analyst Peter Saleh said this was the company’s highest second quarter restaurant margin since 2015, prior to its food safety crisis.
So, what will that acceleration look like exactly? Well, as we’ve previously reported, Chipotle is focused on small (and college) town development.
The company is also bullish on its Chipotlane model, as 80% of its new restaurants include the feature. There’s good reason for this; Chipotlanes have been proven to generate higher sales and higher margins for the company.
Moving forward, Chipotle’s international mix should also ramp up and, in fact, CEO Brian Niccol said the company has added resources to its European operations to “set up the region for long-term growth.” Hartung said that pace will reflect the growth the company has experienced in Canada.
“We’re making great progress in London, Frankfurt, and Paris. Canada continues to really perform; we’re going to fill 10 new restaurants on a base of 34,” he said. “So, you can see how we’re stepping up development there.”
“Once we get performance consistent in Europe like we did in Canada, we’ll start building much more aggressively,” Niccol added.
Meanwhile, earlier this month, the company announced its first ever development agreement to plant a flag in the Middle East. The partnership with the Alshaya Group will bring the brand to Kuwait and United Arab Emirates in 2024. Hartung said that unlike Canada and Europe, a partnership made the most sense in the Middle East because “Alshaya is one of the best operators in the region.”
“We're really excited about where international can go both from a standpoint of partnerships and then company ownership,” Hartung said.
The combination of North American and international expansion will push Chipotle beyond the $10 billion mark sooner rather than later. As Hartung and Niccol pointed out on the call, the company’s unit-count target was 3,000 when it first went public in 2006. Now, it’s 7,000 and Niccol expressed optimism that its target could continue to expand.
“It’s pretty fun to think about we’re closing in on $10 billion, and then I’m sure we’ll be talking about $20 billion and then probably from there we’ll be talking about $30 billion,” he said. “I don’t see a cap on this business anytime soon.”
Contact Alicia Kelso at [email protected]