Chipotle Mexican Grill (CMG, Financial) has been on a rough patch over the last few years mostly due to the health concerns that put the chain in bad light. Several investors, who remain bullish on the growth prospect of the company, believe food safety concerns are no more a problem. However, a recent survey by UBS Evidence Lab shows that customer perception is yet to change as they still cite food safety as one of the key issues of not visiting the chain.
Expanding customer base remains a problem
The brand perception of the chain remains its weakness to a large base of customers who do not wish to try it in the first place. The quick service restaurant has a core group of regular customers. Attracting new customers remains a big challenge for the company.
Chipotle has been working on a turnaround strategy but it has not been effective in gaining traction. The company has been trying to woo new customers to boost revenue and strengthen operations. The fast-casual pioneer showed some improvement in its restaurant- level performance. But these turnaround efforts led to increase in marketing expenses, which in turn can impact the bottom line.
Price strategy may not work
Customers have also cited price as a factor for avoiding Chipotle. Chipotle happens to be more expensive compared with other quick service restaurant players. The company recently increased prices across all of its outlets in an effort to support revenue growth. However, it remains to be seen whether this will ultimately benefit the company.
Considering Chipotle prices are a reason for low traffic, this may not be a smart move. It is highly doubtful whether the price increase would be able to compensate for such low customer traffic. In fact, it might also reduce the customer traffic.
Chipotle is in a difficult spot and the company will have to take some calculated risks to see how it can mend its reputation and improve operations. Attracting new customers will always come at a cost, which will have a bearing on the profitability of the company in the near future.
Breakfast menu could be a bright spot
A good breakfast menu could be a savior for Chipotle and help it see a long awaited turnaround. Several quick service restaurant chains, such as McDonald’s (MCD, Financial), Starbucks (SBUX, Financial), Burger King (BKW, Financial) saw favorable results by introducing healthy breakfast menus, though it took time. McDonald’s took as long as eight years to make its breakfast menu profitable.
All turnaround initiatives come at an implementation cost along with a certain level of risk. Introducing an attractive breakfast menu should draw customers to Chipotle, however, it may not add to the bottom line, initially. In fact, investors should expect profitability margins to be lower since operating expenses will rise due to increased marketing and promotional spending in the near-term.
Disclosure: I do not hold any position in the stocks discussed in this article.
