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Fast-casual restaurant chain Chipotle (NYSE: CMG) is still reeling from a string of health crises that rocked the company last year. Comparable sales have been down by more than 20% for 10 months in a row, forcing the company to go to great lengths to get customers back into its restaurants. Promotions, including its first-ever loyalty program, have been a mainstay of Chipotle's turnaround effort so far.
Chipotle is now starting to lap its awful results over the past year, so its comparable numbers will begin to look better in the coming quarters. The company expects to report high-single-digit comparable sales growth during 2017, a pace that will still leave sales well below pre-crisis levels. I've argued before that Chipotle's turnaround is going to take longer than many are assuming. Next year will be the start, not the end, of Chipotle's comeback.
The good news for long-term investors is that time will eventually heal these wounds. Chipotle's crisis will be history 10 years down the line. The company should be much bigger by then, as it continues to grow its store base at a blistering pace. And one of its concept restaurants may eventually grow to become a major chain in its own right.
Chipotle will recover. But those expecting a return to the company's heyday, when Chipotle truly had no peer, may be disappointed.
Chipotle operated 2,178 restaurants at the end of the third quarter, and it plans to open an additional 195 to 210 restaurants next year. If Chipotle manages to grow its store count by 10% annually over the next decade, its restaurant count would stand at about 5,600 in 10 years.
Essentially all of Chipotle's restaurants are in the United States; the company operates just 27 Chipotle locations in international markets. There's still plenty of room to grow in the U.S., particularly because Chipotle is more value-oriented than many of its fast-casual peers. There are more than 14,000 McDonald's restaurants in the U.S. alone. Chipotle's ceiling may be far lower, but the U.S. can likely support thousands of additional locations.
In addition to building more U.S. restaurants, Chipotle will likely attempt ramp up its international expansion efforts over the next decade. It has been slow on that front, and it's unclear exactly how well the concept will translate overseas. But the potential is there for thousands of additional locations in international markets.
Beyond Chipotle's namesake restaurants, the company is incubating two concepts. Tasty Made, a burger chain with a simple menu, just recently launched its first location. The company has also partnered with Pizzeria Locale, a Colorado chain of pizza restaurants. Chipotle currently operates 15 ShopHouse Southeast Asian Kitchen restaurants, another concept, but the company is backing away from that endeavor after disappointing results. If either Tasty Made or Pizzeria Locale gains traction, hundreds or thousands of additional restaurants could be forthcoming.
Never the same
Prior to Chipotle's food safety crisis, the company enjoyed incredible margins and intense customer loyalty. It didn't need loyalty programs to drive traffic, and marketing was minimal. During the first nine months of 2015, Chipotle spent just 2.1% of revenue on marketing and promotions.
With the company now struggling to increase traffic, promotional spending is soaring. Through the first nine months of 2016, 5.2% of revenue went toward marketing and promotions. Chipotle has given out free food through various initiatives, and it launched a temporary loyalty program during the summer.
My suspicion is that the free ride that Chipotle has enjoyed in the past when it came to marketing is over. It is going to have to be more promotional going forward, and that will eat into profitability. Expansion in international markets and these new concepts will require increased marketing as well. None of this is to say that Chipotle can't return to its previous level of profitability, but it won't be easy.
The Chipotle of the future will be much larger, with thousands of additional locations, potentially spanning the globe. But the effects of its food safety crisis will linger, tarnishing its brand and forcing the company to work harder to get customers into its restaurants.
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Timothy Green has no position in any stocks mentioned. 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.