The pandemic and ensuing lockdowns devastated restaurant sales in 2020. As the industry slowly recovers, the question is, will there be lasting changes that affect the business model.
Fast-casual food chain Chipotle is on the front line of some of that change. Its digital orders as a percentage of sales soared to 70% at one point last year, up from a pre-pandemic 20%. As dining rooms began to open again, digital settled down to 50% of the total, but it still saw robust growth in the fourth quarter, climbing 177% year over year to about $781 million.
In part, Jack Hartung, Chipotle’s finance chief, credits how convenient the company has made digital ordering, with app and website enhancements such as unlimited customization, contactless delivery, and group ordering.
However, the more important point is that Chipotle, with its strong balance sheet, was already investing heavily in digital platforms when the pandemic hit. “It was kind of too late to pivot if you hadn’t already made the right investments,” Hartung tells CFO.
We asked Hartung about how Chipotle continues to adapt to the pandemic and ponders its restaurants’ future. The interview has been edited for length and clarity.
Near-term, at least for the next year-and-a-half, do you think digital sales will stay in the 50% range?
We have a few markets in the Southeast and Southwest that have been the least impacted by COVID, and they’ve recovered the most since COVID started. And digital sales there have not fallen below 40%. I would guess that digital is going to settle in between 40% and 50%. It’s a frictionless and convenient experience. But sometimes you’re looking for a sit-down meal, you’re looking for social engagement. There will still be occasions when you want to come into the restaurant and dine with family or friends, or co-workers.
Chipotle forecasts opening about 162 restaurants in 2021, and possibly as many as 200. Will restaurant formats look any different given digital is a larger slice of sales?
In the overall portfolio of new openings, the restaurants will look and feel very similar, with a few exceptions. All of them have been designed for a number of years with the digital make line and the digital pickup shelves — when you walk in, you know exactly where to pick up your food.
A couple of things on the edges may change. Chipotlanes [a drive-thru for digital orders] is one. More restaurants will have them. You’ve already paid and told us what time you want to come. All you have to do is show up in our lot, drive up to the window, give us your name, your food is handed out, and you’re gone. That experience takes from 10 seconds to sometimes 40 to 50 seconds. There’s usually not even a car in front of you versus a drive-thru experience, where the average wait in the industry is four to five minutes.
“[Urban areas] are not going to be the highest priority on our list. But over time, I do believe the urban centers are going to come back.”
You won’t see a Chipotlane in [urban areas]. But what you might see is a pickup window. We have a few of these. Instead of going into the restaurant and navigating through the line, you walk up to a window, the window opens, you give your name, and get your food. That’s a convenient access point in urban areas.
We have a spectrum of restaurants that we could build, all the way to the extreme of digital-only with no dining room. We can now look at the trade area and select the access points as needed. For example, if we want more seating or less seating, we can flex that up and down.
Are you going to be opening fewer restaurants in urban areas because of the uncertainty around office workers’ return? And are there real estate deals to be had because of restaurant closings?
[Urban areas] are not going to be the highest priority on our list. But over time, I do believe the urban centers are going to come back. We have great sites in cities like New York, Chicago, and San Francisco. We’re going to want to see where people are working, where they’re living, and where they’re playing. In the short term, maybe [we hit] the pause button. … But office workers love the convenience, and they love the quality of the food.
[As to] real estate, there are not “screaming” economic deals. We’re getting more deals than we normally would. That’s why we’ve signaled this year that if COVID doesn’t slow the timeline, we should be able to increase openings from 162 to about 200. So, there are more deals to be had. Where restaurants have gone out of business, though, are “B” and “C” trade areas — those aren’t usually the areas that we [open restaurants in].
Chipotle is also obviously doing more delivery, whether through its app or others. How do you feel about non-Chipotle employees being the customer touchpoint more often?
About one-third of delivery comes through our own app, and our delivery partner is DoorDash.
[Regardless of the delivery service,] the experience has to be extraordinary. We have to have a strong partnership with any delivery partner. The first thing that we insist on is that the systems are integrated. That’s important. When you walk into an independent restaurant, you’ll see delivery drivers coming in and out and workers with four or five iPads or tablets. There’s a separate tablet for each delivery company. It’s chaos for the crew and it’s chaos for the customers. At Chipotle, all orders come into our digital-make-line crew and they don’t know if an order came from a delivery partner or through our app.
The other part, though, I think you’re alluding to is that DoorDash, Uber Eats, and the others have great customer service people and people who are reliable and presentable. We have conversations about that with our partners all the time.
On the other end of the supply chain, did you have any upstream issues early on in the pandemic or since?
During the first several weeks, it was the most significant shift in the supply chain that I’ve ever seen. But our team did a great job. They made sure our restaurants were supplied with the things they needed — like gloves. We had never had a problem getting gloves before. And other [supplies] that you never think about. If you have a cooler full of food and you’re ready to serve, but you don’t have soap, you can’t open the doors. The health department won’t let you.
The other thing I’m really proud of is what occurred when the demand shifted away from restaurants to groceries quickly. … In those early weeks, our sales were down as much as 35%. When your sales drop 35% so fast, you’ve already committed to all those perishables — the produce, the meat, the dairy. But our team worked hard in partnership with our suppliers and distributors to divert [the supply of] milk, for example, to grocery stores. You probably read that a lot of milk was just poured down the drain because companies couldn’t shift the supply chain, and [milk has] a limited shelf life. But we wasted none of it. It wasn’t just an economic decision; it’s disheartening to our farmers if all their efforts lead to wasting the dairy [what they produce].