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Morningstar | Digital, Menu, and Marketing Strategies Anchor Chipotle's Comeback but Reflected in Market Prices

Once the benchmark by which fast-casual restaurant chains measured themselves, Chipotle finds itself on the path to recovery after a series of food safety incidents. We've believe that Chipotle's recovery is unlikely to share the same pace that other restaurants in similar situations faced in the past, as it represents a unique situation because the food safety incidents call into question the "Food With Integrity" mantra that its brand was built upon (as evidenced by 2016 comparable sales declines of 20%). In our view, it will still take time for Chipotle to rebuild its consumer trust and restore its customer experience/throughput capacity, with the implementation of new food safety protocols and social media each representing potential threats to its recovery. On top of these risks, we also believe Chipotle will adopt a more traditional quick-service restaurant playbook, relying on conventional marketing, increased promotional activity, and new product introductions to drive traffic. In our view, this could put longer-term post-recovery comparable sales growth closer to the mid-single-digit range, not the 10% growth the chain averaged between 2010 and 2014.That said, we still believe Chipotle possesses several strategic advantages, including a simple but uniquely customizable menu and aesthetically pleasing restaurant designs. We also believe CEO Brian Niccol (the former CEO of Taco Bell who was appointed in 2018) will drive new approaches to menu innovation, marketing, mobile technologies, delivery, and restaurant experience while elevating Chipotle's brand intangible asset. Chipotle will continue to keep its unit growth in check--140-155 new restaurant openings in 2019 compared with 240 in 2016--we expect the firm to refocus on its customer experience and gradually rebuild the brand equity it once had--aided by restaurant remodeling (including a second make-line for digital ordering at many locations) and employee investments in 2018--with new menu items, online ordering/payments, catering, delivery, "Chipotlane" pickup window locations, and other alternative restaurant formats, and daypart expansion offering longer-term top-line upside potential.