Chipotle Has a Plan to Turn Its Business Around

By Markets Fool.com

More than a year since the first E. coli outbreak made customers ill at a Chipotle (NYSE: CMG) restaurant, the chain continues to struggle to win back business.

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The Mexican fast-casual chain reported that revenue decreased 14.8% in the third quarter of 2016 while comparable-restaurant sales dropped by 21.9%. Restaurant-level operating margin also fell to 14.1%, a decrease from 28.3%, and net income came in at $7.8 million, down from $144.9 million.

The third quarter covered the July 1 through Sept. 30 period, when three of the company's four E. coli outbreaks occurred in 2015 (a December incident in Boston turned out be norovirus). And while Chipotle has certainly not completed its recovery, co-CEO Steve Ells believes his company has made progress in its comeback and he seemed confident during the earnings call that it would eventually rebound from its food-safety scandal.

"We are beginning to emerge from the most difficult year in our history and are seeing many reasons to be optimistic that we are headed in the right direction to restore our business to a place our many shareholders will be proud of," he said, according to a transcript of the call by Seeking Alpha (registration required). "2016 will be marked as a significant reinvestment year as we continue to work to make Chipotle a stronger company in the wake of last year's events."

Ells detailed a very specific plan for Chipotle's continued comeback. Those efforts include "delivering a safe and extraordinary guest experience in every restaurant, restoring trust and building sales, restoring our economic model and enhancing the guest experience through innovation." There's much more to it and the co-CEO, along with other company executives, shared their vision during the Oct. 25 call.

Chipotle has been working on improving the customer experience. Image source: Chipotle.

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Menu innovation could include dessert

Chipotle has a relatively small menu compared to many of its rivals and a new addition tends to be a big deal. For example, Ells noted that the recent nationwide rollout of chorizo now accounts for 7% of entree sales. He believes that carefully selected further additions should help bring customers back.

One possible menu item would be a first for Chipotle. Ells acknowledged during the call that the company may get into the dessert business."We're also currently testing two different desserts and we hope to select one to offer in the near future," he said. "We believe that there's an opportunity to excite current customers and to attract new customers through thoughtful menu development and we're exploring these options."

Improving the customer experience

Chipotle plans to more heavily promote digital ordering as a way to get customers their food faster.

"Nearly all of our restaurants have a second make-line in the back of the restaurant where we fulfill digital, fax, and catering orders," said Ells. "By optimizing the use and design of these second make-lines, we envision a time when digital ordering could account for a much larger percentage of sales than the 6% it represents today."

To make that happen, the company has been working on improving the efficiency of its behind-the-scenes production lines.

"The new line is a much more ergonomic and efficient design, configured such that less labor will be required to produce higher sales volumes, and does so more quickly," the co-CEO said. "The new line incorporates an advanced queuing system that takes advantage of a heads-up digital display, which allows our crews to assemble orders without distraction."

Ells explained that the new lines, which are being rolled out first to higher-volume stores, let employees assemble orders faster and allow "reduced errors and more consistent portion sizes for our customers; all of which we believe will help us drive increased sales volumes."

There's a long road ahead

Ells turned the conference call over to his co-CEO, Montgomery F. Moran, who made it clear that getting the chain back to where it was will not be easy. He repeatedly mentioned a focus on food safety, making it clear that Chipotle has not lost sight of why it got into trouble in the first place.

"As we move forward with our recovery plans, the guest experience remains our greatest area of focus," he said. "Providing an excellent guest experience starts with serving food that's always safe and delicious."

He also explained that it has established an independent Food Safety Advisory Council "made up of some of the country's foremost experts in food safety and food microbiology." The council will be charged with continuously reviewing the company's food safety efforts while looking for opportunities to improve them.

Moran acknowledged that safety alone would not bring customers back. He said that continued improvement would be needed to complete the comeback, including delivering on something that impacts many of the meals it serves."We continue to look for ways to improve the quality of the food we serve, including our quest for better tortillas made with no artificial additives or preservatives, a promise we made last year and are close to fulfilling," he said.

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Daniel Kline has no position in any stocks mentioned. He has yet to try the chorizo, but wants to. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.