On Tuesday afternoon, Chipotle Mexican Grill (NYSE: CMG) announced that it had finally picked a new CEO. The fast-casual pioneer appointed Brian Niccol as its new leader, poaching him from Yum! Brands' (NYSE: YUM) Taco Bell chain. Niccol will take over from Chipotle founder Steve Ells on March 5, with Ells remaining as executive chairman.
Chipotle Mexican Grill stock soared following this announcement, and I agree that Niccol is a great choice to lead Chipotle into the future. His track record at Yum! Brands suggests that he will drive a faster pace of innovation at Chipotle, which may be the key to achieving a sustainable turnaround.
Is menu expansion on the horizon?
During the first two decades or so of its growth, Chipotle made barely any changes to its menu. Critics believed that by sticking with a very small, focused menu, the company was missing out on opportunities to attract new customers. However, for a long time, it was hard to argue with the results. As recently as 2014, Chipotle posted spectacular 16.8% comp sales growth.
However, in the wake of Chipotle's late-2015 food safety crisis, sales plunged. Management hoped that if Chipotle fixed the food safety problems and otherwise just did its "thing," customers would eventually come flocking back. That hasn't happened. Average annual sales per restaurant peaked at $2.5 million in mid-2015 but fell to less than $2.0 million in 2017.
Clearly, Chipotle needs to start thinking differently about how it operates the business. That starts with the menu. New menu items and limited-time offers are key tools that other chains use to drive customer traffic.
Niccol had great success at Taco Bell with innovative menu items like Doritos Locos Tacos. While Chipotle has already been working to develop new menu items over the past year or so, I expect Niccol to push the pace of that initiative. Niccol's extensive marketing experience should help Chipotle make the most of future menu innovation as well.
It's also noteworthy that Chipotle mentioned in the CEO announcement that Niccol spearheaded Taco Bell's move into breakfast. Investors probably shouldn't read too much into that statement, but breakfast certainly could be on the menu for Chipotle in the next few years.
Time to focus on operations
One of the biggest benefits of Chipotle's small menu has been the simplicity of operations in its restaurants. It will need to be able to handle a lot more complexity to enable a faster pace of menu innovation.
Niccol should be able to help in this department as well. During his 12-year career at Yum! Brands, he held multiple high-ranking positions at both Pizza Hut and Taco Bell. Taco Bell in particular has a much more complicated menu than Chipotle. Adding to the organizational complexity, Yum! Brands restaurants are primarily franchised, whereas Chipotle has direct control over all of its locations.
Even with the simple menu it has today, Chipotle has plenty of room to improve its operations. The company recognizes that it may be able to win back customers and improve its profit margin by speeding up service and cleaning up its restaurants.
Chipotle needs a risk-taker
For the past two years, Chipotle founder Steve Ells has tried to drive a sales recovery without straying too far from his (and the company's) comfort zone. It hasn't been enough.
By contrast, incoming CEO Brian Niccol has a history of taking risks -- and succeeding. This is the approach that Chipotle needs right now. There may be bumps along the way as Niccol puts his stamp on the company, but it will be worth it if he manages to get consumers excited about Chipotle again.
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