Chipotle CEO Brian Niccol’s Plan to Double the Business. Again.

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You've seen the number that we're targeting 7,000 restaurants in the United States and Canada. We'll probably finish this year just shy of 3,500 restaurants. So we're getting halfway there. You know, so if you start to do the math on this, you can see a quick path to how you can easily double this business again in a big way.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Brian Niccol. He's the CEO of Chipotle. And in this hard-hitting interview ahead, we're going to blow the lid off the whole, what exactly does chicken al pastor taste like?

Question.

Meta, is that too sensationalist?

No, I can't wait to hear the answer.

Just trying to get people jazzed up. Listening in is our audio producer Meta. Hi Meta.

Hey Jack.

Had a chat recently with Brian Niccol. He's the CEO of Chipotle. This was in connection with the Barron's Top CEOs issue. And, um, we covered it all, right? We covered digital ordering. We covered people who like to put dressing on their quesadillas. Do I have that right? They like to put dressing and fajita veggies on their quesadillas. That's the thing. TikTok is involved. And of course, chicken al pastor. What is it? How's it different from regular chicken? If you've spent your life wondering, you've come to the right podcast episode. Anything else we need to cover, Meta?

Uh, burrito inflation.

Burritoflation. We'll get to that too. All right, let's jump into the conversation. Hey, Brian, how are you?

I'm great. How are you doing?

I'm doing well, thanks. Our audio producer, Meta, who is listening in, was just telling me that her 2-year-old son has developed a Chipotle burrito. He's begun demanding burritos.

At 2?

Yeah, he's apparently a big fan. And she says she's taken a lot of videos of him with his little hands holding big Chipotle burritos. So you can tell me in a moment if you're, if you're getting a lot of growth from the 2-year-old demographic. What is— the business seems to be going from strength to strength here beyond the pandemic. What's driving growth for you recently?

Most recently, I would say we've just gotten back to executing the basics of the Chipotle operation. So the last, call it, 24 months between COVID and some of the labor shortages, you know, we really had to create workarounds and Now it's great to be in a position where our restaurants are, for the most part, fully staffed. We've had some stability in the restaurants, so a lot less turnover, and we've been able to get back to the basics of executing what I would call great culinary, great prep, great deployment, great speed. I would say of late, that's been the biggest driver. And then we've had some really nice, I'd say, menu innovations to layer on top of that strong foundation around the fajita quesadilla, and then most recently the chicken al pastor.

How do you come up with a new idea on a business that big? Someone in a meeting somewhere pitches an idea, or you've got test kitchens where you, you try them out, and right, how do you decide which ones to run with?

Yeah, so, uh, we've got a, uh, we call it our Cultivate Center, uh, which is our test kitchen. It's also a place where we test equipment, test culinary, And then obviously we're building a lot of restaurants, so we're also testing new designs, and from new chairs to new artwork to new flow. You've probably heard us talk about, if you've listened to any of our earnings calls, or the stage gate process where, you know, there's always a lot of ideas for food. And, you know, our guys are always looking for what are new trends, what are new flavors that people would like to experience. And we kind of have this belief that we should be leading culture in food. We should be relevant in food culture. Those are the two things we want to be doing. So we try to find things like chicken al pastor to doing simple things like the fajita quesadilla. And the guys concept test a lot of different ideas and, you know, there's always a few that seem to rise to the top. And then we take it through our stage gate process where we make sure, you know, we can actually cook it across 3,200 restaurants. Can we supply it across 3,200 restaurants? And then we go and do it in a test to find out what type of demand there is and what are the implications on the rest of the business. And then once we understand that, then we take it to market. And that's why most recently Chicken Al Pastor has been in the marketplace.

I don't want to sound unsophisticated, but Chicken Al Pastor, what is— it's different in the seasoning, the preparation? What, what's making Chicken Al Pastor a hit?

Yeah, primarily seasoning. Usually pastor you'll find on pork. Traditionally. So it's kind of got like a sweet and spicy note to it, uh, versus our adobo chicken has definitely got a little bit more of like that slow heat. This is the sweet and spicy, and primarily the sweetness comes from pineapple, and then, you know, the spicy comes from a variety of peppers that we use. That's al pastor versus something that's like in culture would be the fajita quesadilla, right? This TikTok influencer, uh, Keith Lee, You know, he was talking about how he was putting fajita veggies in his steak quesadilla and then getting a side of sour cream and our honey vinaigrette. It was, you know, just a home run. When we saw that happening, we're like, well, let's be a part of kind of that TikTok influencer culture. It was obvious we already had the fajita vegetables on the menu, we already had sour cream on it, so we just made it more readily available through our online app, and that proved to be pretty powerful.

Interesting. I was just testing you on the Al Pastor, by the way. You passed with flying colors. I knew all that stuff. Now, now what about operationally beyond the menu? Tell me about some areas where you've been tinkering, whether it's keeping the lines moving well or with the digital ordering. Where have you gotten some good results recently?

Yeah, so this is one that's a great problem to have. Our digital business before COVID was, you know, call it 15% of the business. With COVID At one point it was the business, but now it's settled in to be about 40% of the business. So it went from being a couple hundred million to now it's a $4 billion business basically. And then our frontline business now is doing about $6 billion. So when I first started this job back in 2018, the whole company was a little less than $5 billion. It was like $4.8. So the good news is we now have a really compelling in-restaurant business and a really compelling digital business still being served by one kitchen, right? But here's the challenge. So the good news with the digital make line is we eliminate any bottleneck where like a digital order gets in front of an in-restaurant order, or, you know, you walk into the restaurant, you're not sure where do I go for digital pickup, if I want to order in the line. So we've solved a lot of those problems. The thing that was kind of a surprise is how big the digital business became for us so quick. And what that created in the restaurant was a real dilemma for our team members of like, how do I deploy between the digital orders and the frontline orders? So one of the things we're really working on right now is in our digital business, we have the ability to allocate X number of orders per 10 minutes. So like if you go into our app, make it up at 12:55, place your order, it will ask what time do you want to pick this up. You know, first available might be 1 o'clock, the 1:10, 1:20, 1:30. What we've been playing with is how many orders should we allow in each 10-minute slot depending on how many people we have working in the restaurant. So if there's only one person working on the digital make line, we only want to let about 10 orders through per 10 minutes. And also we want to give enough buffer where if you show up at 12:57, then the 1 o'clock slot is no longer available. You can only order at 1:10. And the reason why this is important is if that digital make line all of a sudden has like 20 orders in that 10 minutes, what'll happen is we'll take guys off the front line to go make digital orders. And what they do is then people coming through the front door just get told, hey, hang on a second, I got to take care of a couple of these orders, I'll be right back to the front line. And that's not what we want to have happening. What we want to have happening is we want 3, 4 folks on that front line all the time so that when you come into the restaurant, we get you down the line really fast. We also want to be accurate and on time for you when you order digitally. And we also don't want to create this dilemma for our team members where they feel like they got to choose between servicing the front line or the digital make line. So this is something that we're spending a lot of time on because the good news is we have the ability to kind of control how many orders go to each line. And then if we see a pattern where it's like, hey, there's just always a lot of orders coming to the digital make line, maybe we need to make sure we're deploying 2 people to the digital make line. And so then we think about building a different schedule so that we've got more people in the restaurant at those peaks.

Thank you, Brian. Let's take a quick break here. We'll be back with more of the conversation.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. Let's jump back into our conversation with Chipotle CEO Brian Niccol. What's the latest thinking on how big this business can become? Tell me about your long-term ambition.

We've talked about getting to $3 million average unit volumes. The good news is we're closing in on that. We're now starting to set our sights on $3.5, $4 million average unit volumes out of our existing restaurants. We've seen the number that we're targeting, 7,000 restaurants in the United States and Canada. We'll probably finish this year just shy of 3,500 restaurants. So we're getting halfway there. You know, so if you start to do the math on this, you can see a quick path to how you can easily double this business again in a big way. Both in restaurant count and revenue. We're really optimistic about that. And then we're just getting started, frankly, with some international expansion. We're in the early days in Western Europe, but we're continuing to see really good top-line growth in the few restaurants that we have in London and Paris. So I'm optimistic about that. So if you roll the ball down the field on this, I really hope we've got 7,000 restaurants doing well over $3 million average unit volumes. Hopefully people are talking about Chipotle everywhere, you know, a lot of other places outside the United States.

For burrito superfans who are worried about burritoflation, burrito inflation, are the worst of their fears behind them, or is there gonna be continued inflation? What do you think is gonna happen to cost and to prices as you move forward from here?

Look, if I knew exactly where everything was going, you and I would probably be on our way to Las Vegas betting on a few other things. But what I can tell you is we have seen food inflation really moderate. We're not seeing deflation, but we've definitely seen the inflation kind of come to a meaningful slowdown. And in some cases, like avocados, we've seen some deflation on avocados. And on labor, The good news is we're now more in this 3% to 5% inflation versus we were running double digits before. So in the case of Chipotle, and I can't speak to everybody, we've been able to not take any pricing so far in 2023, and I prefer not to take pricing if we can figure out how we can grow the business and then just be really efficient so that we don't have to take additional price. I mean, one of the things I think that makes Chipotle pretty unique is our value proposition's really compelling. When you think about the caliber of the food, the culinary of the food, you know, our food with integrity principles that then come to life through the culinary, the fact that you can still get a chicken burrito for less than $10, pretty compelling. When you asked me earlier, why do you think you've had strength to strength? One of the key things that we've been very protective of is protecting our value proposition. So for now, you can put some of your burritoflation worries aside, barring any other macro shocks. But I say that I never thought I'd see a lot of things that's happened over the last 24 months.

So, and I understand some people even share those burritos, probably whole relationships out there that have been formed on whether two people enjoy the same burrito. I'm not a burrito sharer, but I can understand it.

Yeah.

Best of luck, Brian. Thanks a lot for your time.

Yeah. Thank you.

Thanks everyone for listening. Meta Lutzov is our producer. Meta, I've been on the go this past week. We've been playing some CEO calls. We have one more of those next week. That's GE CEO Larry Culp. But we're also going to be back next week with a regular episode and the excitement's palpable. Let's be honest. Are you still— Meta, are you there?

Sorry, what?

Electric. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. See you next week.

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