New Year, New Chipotle?

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CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

The year 2016 was another miss for Chipotle. The company continued to find conditions challenging, and failed to see any meaningful improvement in its key metrics. The third quarter results, with comparable sales down -22% y-o-y and revenues down -15% y-o-y, failed to make a mark. Furthermore, the stock price was on a constant downward trajectory. Can we expect the new year to bring new tidings for the scandal hit Chipotle?

The downward trajectory of Chipotle’s stock price
(Jan’16-Dec’16)

28121

In this note we talk about some of the recent managerial changes at Chipotle and what they could potentially mean for the company.

Addition Of Four New Members To The Board

A few weeks back, Chipotle announced the addition of four new board members. The members, Paul Cappuccio, (Time Warner), Robin Hickenlooper (Liberty Global), Ali Namvar (Pershing Square), and Matthew Paull (Pershing Square, ex-McDonald’s) will serve through the 2017 annual meeting. Investors hope a board shakeup will help spark a turnaround for the company, which has been unable to get over the E.coli scandal.

The old board was criticized as it lacked experience in the restaurant industry. However, with Paull and Hickenlooper entering the board, this complaint should be dispelled.

 Return Of Steve Ells As The Sole CEO

Another interesting development is the announcement regarding the return of Steve Ells as the sole CEO of the company, while he continues to head the Chipotle board. As he takes up the reigns of the company, Ells hopes to revisit the old operating model of Chipotle. He wants to simplify operations, while providing customers with great experiences by way of tying employee incentives to the level of guest experiences.

The Mexican restaurant has now started paying its employees above the federal minimum wage and provides benefits including paid vacation time, paid sick leave, and tuition reimbursement to all employees. This is likely to quell the unrest seen among its employees and allegations made against it regarding wage theft.

Ells further commented on re-envisioning its Restauranteur program, which has lately become increasingly complex. The Restauranteur program recognizes the company’s elite restaurant managers and provides a pipeline for its future leaders. The program was marked as a cornerstone of Chipotle’s field operations. We can expect, under Ells’ leadership, to see the Chipotle model becoming less complex, even as it tries to win back support through innovation and “making better food accessible to more people.”

Improving The Guest Experience

As Ells’ mentioned in the press release, his primary focus upon taking leadership would be to improve the guest experience. In order to get people visiting the Chipotle restaurants again, at the same frequency as before, it is imperative that the company is able to instill trust among its customers while providing them with an unforgettable eating experience, unbridled by long queues. To this end, the company has employed a large workforce, to the extent of being overstaffed. The Mexican restaurant wants to ensure a great customer experience at all costs.

Conclusion

Although a number of managerial changes have occurred at Chipotle this year, it is quite unlikely that the company will see a sudden turnaround next year. It will have to incur considerable amounts on marketing and promotions, along side managing food safety. In addition to this, the large workforce to provide a top notch guest experience is likely to result in higher wages. All of this is likely to burden the Mexican restaurant, and consequently, we expect the company’s margins to stay flat in the coming year.

Have more questions about Chipotle Mexican Grill (NYSE: CMG)? See the links below:

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Chipotle Mexican Grill

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