Chipotle Shares Soar With Spiced Up Menu: Must Rivals Worry?

Shrugging off the demons of an unprecedented health crisis related to the E. coli outbreak, Chipotle Mexican Grill, Inc. (NYSE:CMG) has scripted a turnaround to regain some of its lost sheen. Backed by a marked change in the menu items according to the evolving taste buds of consumers and digital ordering system, the company’s growth momentum is likely to continue in the future.

The silent yet pronounced shift in dietary preferences has brought to the fore evolving business models from quick service restaurants and startup firms as demand has far outstripped supply. With such a remarkable rebound, Chipotle has surely ruffled the feathers of some industry bigwigs.

The Turnaround Story

Chipotle was rocked by the news that about 60 of its customers fell ill in 14 states in late 2015 and early 2016 with the outbreak of E. coli. Although the company maintained stringent health monitoring checks, the actual cause of the incidents was not ascertained. This led to an erosion of trust, and footfall to its restaurants declined.

The negative publicity hit the shares hard and forced a management shakeup to instill new ideas and rejuvenate employee morale. The appointment of new CEO Brian Niccol in 2018, the former head of YUM! Brands, Inc. (NYSE:YUM) owned Taco Bell, soon worked wonders as he aimed to “change the cultural narrative around the brand” and sales rebounded.

The Perfect Blend: What Really Worked?

With Nicol at the helm, Chipotle introduced new items to the menu to cater to the paleo, ketogenic and other healthier dietary regimes. The company introduced “Lifestyle Bowls” that included salad items along with low-carb high-fat foods that focused on healthy lifestyle and nutrition aspects of consumers. The menu also included vegan and plant-based protein options.

The marketing campaign was aimed at promoting health benefits of the food and create a positive hype around the brand to erase the earlier scars. Dubbed "For Real", the ad messages focused on the more than 50 fresh ingredients featured in the menu, including avocados, pork and lime juice.

In addition to retraining staff on food safety measures and quality checks, Chipotle introduced digital platform for ordering and delivery of foods through apps, website and via on-demand food delivery service DoorDash. The company also continued to invest heavily in its Smarter Pickup Times initiatives to minimize waiting time in queues for ordering food.

Backed by such novel initiatives, shares of the company have surged 53.5% year to date and are currently trading at $662.56 as of May 24, 2019, close to its all-time high of about $759 hit in August 2015.

Road Ahead

With increasing health awareness and public campaigns regarding the adverse effects of processed red meat, consumers are gradually shunning meat-based products for meatless alternatives. This encouraged firms like Beyond Meat Inc. (NASDAQ:BYND) and start-ups like Impossible Foods to come up with plant-based protein products that are similar to the taste and appearance of meat. The innovative products instantly caught the fancy of consumers with a distinct appeal to their taste buds, and have witnessed exponential growth in the past couple of years. (Read More: Meatless Burgers Selling Like Hotcakes: Fad or Budding Trend?)

In order to fend off competition and stay relevant with the American culinary habits, Chipotle has started testing a slew of new items such as quesadillas, avocado tostadas, nachos, spring salad and a Mexican chocolate milkshake. Industry experts are betting big on such food items and expect overall sales to improve 10% for the next couple of years with average earnings increasing in the vicinity of 30% over the next five years.

Whether Chipotle can indeed benefit from such increased customer adoption remains to be seen. For the time being, we can safely assume that it has created a ripple in the market, with rival firms probably noting the industry veteran’s ascent with apprehension.

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