While Chipotle (CMG, Financial)’s 61% stock price gain in 12 months means that it trades on a relatively high valuation, its growth strategy could mean it has further upside.
The quick service restaurant business is investing heavily in its digital capabilities, as it seeks to boost its competitive advantage.
It has also recently introduced a loyalty program, while its marketing investment is helping to differentiate it from sector peers.
Although it faces an uncertain outlook, the company’s growth rate suggests that it may continue to outperform the S&P 500 over the long run.
Digital investment
Chipotle’s investment in its digital offering has the potential to improve customer experience and boost its sales growth. The company has recently added mobile order pickup shelves in all relevant restaurants, reducing delivery times. Delivery drivers are no longer required to wait for orders upon entering a restaurant, instead selecting the appropriate order from the shelf before heading towards the delivery destination.
Mobile order pickup shelves have increased sales to above the company’s national average in restaurants where they are in use. They are expected to be rolled out to all applicable restaurants by the end of 2019.
The company has also recently launched a new website that has led to improved customer conversion, now averaging over 1 million digital transactions per week. The addition of drive-through lanes to a larger number of its restaurants is expected to take place throughout the year following a successful test. These allow customers to collect their online order at a specific time without leaving their vehicle, thereby increasing convenience and customer satisfaction.
Innovative strategy
The recent launch of Chipotle’s rewards program is set to improve customer loyalty. It allows the company to gather data on customer ordering habits to provide increasingly personalized offers that could boost customer engagement levels. The loyalty program already has 3 million members enrolled, with the company’s data gathering process expected to be refined over time. Since the loyalty program has been developed to fully integrate with the rest of the company’s digital system, such as mobile ordering and delivery, its ease of use could further enhance the customer experience.
The company’s marketing campaign is expected to further differentiate its offering from that of rivals. Its recent "For Real" advertising resonated with customers, while its "Behind the Foil" campaign has showcased the connection between the quality of ingredients and the end product. Such campaigns are further aligning the company with evolving customer tastes in an era where provenance and sustainability are becoming increasingly valued by consumers.
Risks
The quick-service restaurant industry faces an uncertain future, with a saturated market having the potential to weigh on its growth. Between 2012 and 2018, the number of quick-service restaurant franchises in the U.S. increased 29%. Since many major operators have ambitious growth plans, higher levels of competition are expected to lead to modest sales growth of 3.6% across the restaurant industry in 2019. This is lower than the annualized growth rate for the industry of 6.4% between 1970 and 2018.
In order to enhance its competitive position relative to peers, Chipotle is focusing on improving the customer experience through investment in its staff. As part of this, it is supporting its general managers through better leadership training that provides clear direction on career progression. This has contributed to reduced employee turnover. The company is also investing in a greater number of cooking demonstrations to improve the quality and consistency of its food. This has contributed to higher scores among guest experience surveys, and may differentiate the company in a highly competitive market.
Outlook
In the next fiscal year, Chipotle is forecast to record a rise in earnings per share of 28.5%. This helps to justify its forward price-earnings ratio of 53, and suggests that the stock could be fairly priced given its long-term growth outlook.
The investment being made in its digital offering and in improving the customer experience could strengthen its competitive position at a time when the wider quick-service restaurant industry is set to post a slower growth rate.
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